Maintain ADD on Bharat Petroleum Corporation - Spike in inventory gains! - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

We maintain ADD on Bharat Petroleum (BPCL) with a price target of INR 384, owing to an expected recovery in demand for petroleum products and, subsequently, refining margins. 2Q reported EBITDA/APAT came in at INR 39/24bn as against our expectation of INR6bn and INR11bn of losses at EBITDA and APAT, owing to better-than-anticipated core GRM, gross marketing margin and inventory gains. Total inventory gains were INR 25bn as against our expectation of inventory losses of INR0.9bn. Forex gain stood at INR 1.5bn (HSIE INR -5bn). Adjusting for these, core EBITDA stood at INR 12bn (HSIE INR 0.1bn), -55/-63% YoY/QoQ.

Refining: Crude throughput in 2Q stood at 5.6mmt (-26.5/+9.5% YoY/QoQ). Utilisation at the Kochi/Mumbai refinery stood at 72/95%, given lower demand amid the lockdown, leading to lower throughput. Core GRM stood at USD 1.5/bbl vs. USD 3.8/1.9 YoY/QoQ. GRM declined sequentially with a fall in naphtha, gas oil, LPG, fuel oil and jet kero cracks. We expect crude throughput of 28.5/33.1mmt and core GRM of USD 3.6/3.8 per bbl in FY21/22E.

Marketing: Domestic marketing sales volume was 8.9mmt (-13% YoY). BPCL's market share declined YoY vis-à-vis India's consumption of petroleum products (-11%YoY), given its strong presence in urban areas that were more severely affected by the COVID-19 pandemic. Blended gross margin stood at INR 5.2/lit (+17/-24% YoY/QoQ). We do not expect a sharp recovery in marketing volumes in 2HFY21 and expect marketing margin to correct from the current level.

Call takeaways: (1) The FY21 Capex guidance has been revised from INR 125bn to INR 80bn, out of which INR 25bn was expended in 1HFY21. BPCL plans to spend INR 1.24 lakh crores on Capex in the next five years. (2) Divestment process is ongoing, although, it seems challenging to conclude it by Mar-21. (3) BPCL added 962 retail outlets in 1H and is planning to add 900 more in 2H. Over the next three years, 6,000 outlets are likely to be added. (4) Net debt at the end of 2Q was INR 180bn, which has seen a substantial reduction that can be seen in the debt-equity ratio of 0.74 in 2Q vs 1.26 in 4QFY20. (5) The execution of Propylene Derivatives Petrochemical Project at Kochi has been delayed further to 2HFY21 due to delay in licensing.

Sum of the total parts-based valuation: Our price target comes to INR 384/sh (5.5x Sept-22E EV/e for the standalone refining and marketing businesses, 6x Sept-22E EV/e for the pipeline business, and INR 130/sh for other investments). The stock is currently trading at 7.4x on FY22E EPS.

Shares of BHARAT PETROLEUM CORPORATION LTD. was last trading in BSE at Rs.346.8 as compared to the previous close of Rs. 354.3. The total number of shares traded during the day was 112564 in over 1900 trades.

The stock hit an intraday high of Rs. 358 and intraday low of 344.6. The net turnover during the day was Rs. 39186796.

Source : Equity Bulls

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