BPCL's Q1FY19 results (Outperformer) - Inventory gains offset muted Kochi performance

Q1FY19 highlights

• BPCL reported PAT at Rs22.9bn (+208% yoy IDFCe Rs24bn). EBITDA of Rs38.8bn, +216% yoy (IDFCe Rs37.4bn). Reported numbers include Rs12.6bn of Refining and Rs14bn product inventory gain.
• Marketing margins of Rs4285/t, 5% higher yoy despite sharply lower retail fuel margins which was offset by higher other product margins in the quarter.
• Marketing volumes of 11.28mt, up 7.1% yoy (IDFCe 11mt), driven by 6/3/11% growth for MS/HSD/LPG. 
• Refining thruput of 7.74mt driven by 18/22% growth in Mumbai/Kochi thruput to 3.7/4mt. GRMs of $7.5/bbl (up 53% yoy but below IDFCe of $8.3/bbl) Miss vs estimates due to lower inventory gains of US$3.3/bbl (IDFCe US$3.6/bbl) and core GRMs of US$4.2/bbl (-40% yoy, IDFCe $4.8/bbl)
• Earnings impacted by sharply higher forex loss of Rs7bn (IDFCeRs2.5bn) vs gain of Rs292mn in Q1FY18

Key positives: Strong refining thruput, strong marketing volumes, growth in marketing margins.

Key negatives: Kochi margin profile remains below estimates.

Impact on financials: We have revised FY19 EPS down ~7% to factor lower retail margins/ lower Kochi GRMs. TP revised 7% down to Rs480/sh

Valuations & View

Despite the weaker refining performance, we see prospects for BPCL improving over FY19-20E. The steady ramp up in Kochi implies the core GRMs for the refinery will improve gradually from levels of US$3/bbl in Q1, with Mumbai performance to also improve. This implies refining segment profitability should expand over FY19-20E, with benchmark GRMs likely at US$6.5/bbl for the period. The marketing volume growth of 7.2% is 450bps higher than last 4yr average and we see the stabilisation of market share in petrol/diesel as a material positive. We keep our retail margins to Rs2.5/ltr levels, owing to the charged political environment and the higher crude prices which reduce leeway to expand margins for BPCL. However, given the strength in other product margins and better volume growth along-with share of JV/Subsidiary refineries like Bina/NRL to BPCL’s consol earnings, EPS CAGR for FY18-20E at 5%, with RoE/RoCE for FY20E at 18.6/14.4% remains attractive. Reiterate Outperformer.