BPCL's Q4FY18 results (Outperformer) - Strong quarter; retail margins remain the only monitorable

Q4FY18 highlights

• BPCL reported PAT at Rs26.7bn (+24% yoy IDFCe Rs22.3bn). EBITDA of Rs37.2bn, +68% yoy (IDFCe Rs34bn). Reported numbers include Rs3.5bn of Refining and Rs1bn product inventory gain.
• Marketing margins of Rs5050/t, 23% higher yoy due to sharply higher retail fuel margins and also higher other product margins in the quarter. Marketing volumes of 11.1mt, up 9.9% yoy (IDFCe 10.95mt), driven by double digit growth for MS/HSD and also strong other product growth. 
• Refining thruput of 7.85mt a record high led by 4mt thruput from Kochi (103% utilisation). GRMs reported of $6.5/bbl (up 8% yoy but below IDFCe of $6.9/bbl) Miss vs estimates due to lower inventory gains of US$0.9/bbl (IDFCe US$1.5/bbl) even as core GRMs of US$5.6/bbl (-5% yoy) was US$0.2/bbl higher than estimates.
• FY18 EBITDA/PAT of Rs116.6bn/79bn vs FY17 EBITDA/PAT of Rs108/80.4bn. We note that marketing inventory gain of Rs19.9bn in FY217 far higher than the Rs1bn in FY18. Net of this EBITDA has grown 30% yoy

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

Key negatives: 42/49% yoy growth in Depreciation/interest costs.

Impact on financials: We have revised FY19/20E EPS down ~4% to factor lower retail margins. TP revised to Rs525/sh

Valuations & View

A strong FY18 for BPCL sets the stage for stronger metrics over FY19-20E. The steady ramp up in Kochi implies the GRMs for the refinery will improve materially from levels of US$6.4/bbl in FY18, with Mumbai performance in FY18 (14.3mt thruput, GRMs of 7.3/bbl) also ahead of estimates in FY18. 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 7.5% is 500bps higher than last 4yr average and we see the regaining of market share in petrol/diesel as a material positive. We have reduced 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 4%, with RoE/RoCE for FY20E at 18/14% remains attractive. Reiterate outperformer