BPCL's Q2FY18 results (Outperformer) - Strong marketing performance offsets miss on GRMs
Q2FY18 highlights
- BPCL reported PAT at Rs23.6bn (+81% yoy IDFCe Rs23.2bn). EBITDA of Rs35.3bn, up 155% yoy (IDFCe Rs34.6bn). Reported numbers include Rs4.85bn of Refining and Rs1.85bn product inventory gain.
- Marketing margins of Rs4419/t, 12% higher yoy (IDFCe 4325/t). Marketing volumes of 10.4mt, up 8.7% yoy (IDFCe 9.6mt).
- Marketing earnings impacted by inventory loss of Rs7.3bn vs gain Rs4bn in Q4FY17 and a gain of Rs12.8bn in Q1FY17. Earnings also impacted by a 25% yoy increase in employee costs and a 13% increase in other opex, driven by pay revision and higher Kochi opex.
- GRMs reported of $8/bbl (up 2.6x yoy but below IDFCe of $8.5/bbl) Miss vs estimates due to lower core GRMs of $6.5/bbl (+70% yoy but below IDFCe $8/bbl).
Key positives: Resilient GRMs, strong marketing volume growth & higher marketing margins
Key negatives: Depreciation/interest costs of Rs6.4bn/Rs2.3bn rose 42/129% yoy owing to Kochi capitalization. Core GRMs below Singapore benchmarks.
Impact on financials: FY18/19E EPS unchanged, we introduce FY20e EPS of Rs41.6/sh. TP rollover to FY20E EPS multiple, raised to Rs575/sh.
Valuations & View
Core operating metrics for BPCL look set for better times over the next 15-18 months. The commissioning of Kochi has completed in Q2FY18, setting the stage for a refining boost over FY18-20E. This implies refining segment profitability should expand over H2FY18-FY20E, with benchmark GRMs and key product spreads in Q3 still above last 5 year averages. Going forward we believe that the improved operational environment should reflect in stronger profitability for BPCL, with the growing share of non-domestic LPG (which earns higher margins) and also non subsidised LPG (via “give it up”) is likely to support higher profitability of the marketing segment for the OMCs. Coupled with the rising share of JV/Subsidiary refineries like Bina/NRL to BPCL’s consol earnings, EPS CAGR for FY16-19E at 12.7%. Reiterate outperformer
Bharat Petroleum refines crude oil and markets petroleum products in India. Co. offers fuels and services, as well as lubricants, including automotive engine oils, gear oils, transmission oils, specialty oils, and greases; and liquid and gaseous fuels, illuminating oils, and other products from crude petroleum or bituminous minerals. Co. is engaged in the retailing of petrol, diesel, and kerosene. Co. also imports and exports fuel oil, naphtha, and base oil. Co. serves household and automobile sectors; public and private sectors; and various government establishments, such as defense, railways, state trading corporations, state electricity boards.
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