BPCL's Q3FY18 results (Outperformer) - Marketing volumes, inventory gains offset weak GRMs

Q3FY18 highlights

• BPCL reported PAT at Rs21.4bn (-6% yoy IDFCe Rs19.9bn). EBITDA of Rs31.9bn, down 4% yoy (IDFCe Rs30.6bn). Reported numbers include Rs10.3bn of Refining and Rs5.65bn product inventory gain.
• Marketing margins of Rs3576/t, 12% lower yoy due to sharply lower retail fuel margins in the quarter. Marketing volumes of 11.2mt, up 6.9% yoy (IDFCe 10.2mt), driven by strong other product growth (+35% yoy to 2mt). 
• Marketing earnings helped by inventory gain of Rs5.65bn vs gain Rs1.85bn in Q2FY18. Earnings adversely impacted by a 14% yoy increase in employee costs and a 15% increase in other opex, driven by pay revision and higher Kochi opex.
• GRMs reported of $8/bbl (up 34% yoy but below IDFCe of $8.7/bbl) Miss vs estimates due to lower core GRMs of $4.9/bbl (+36% yoy but below IDFCe $6/bbl).

Key positives: Strong marketing volume growth

Key negatives: Depreciation/interest costs of Rs6.8bn/Rs2bn rose 40/48% yoy owing to Kochi capitalization. Core GRMs below estimates.

Impact on financials: Estimates unchanged post these results.

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 Q4 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 14%. Reiterate outperformer