Bharat Petroleum (BPCL) reported subdued Q2FY17 performance with PAT of R13 billion (down 50% q-o-q, up 26% y-o-y). EBITDA at R14 billion was 50% below estimate; however higher than expected other income (3x) implied only a 25% miss on the bottomline.
The miss was attributed to stabilisation and lower distillate yield at its brown-field Kochi expansion which will progressively earn margins at a premium to Singapore benchmarks. Q3FY17 appears robust as 1) QTD Singapore benchmark at $6.7/bbl is up 30% q-o-q 2) October product sales are up 9% versus Q2 average with diesel/petrol up 16%/6% respectively 3) Retail margins remain robust. On structurally higher GRMs post Kochi expansion, we raise our target price to R755.
GRM led disappointment, Kochi stabilisation under way
GRM of $3.1/bbl (down 49% q-o-q, 20% y-o-y) was at $2/bbl discount to Singapore in the absence of inventory gains. HPCL/IOCL reported GRM of $3.2/$4.3/bbl respectively. Kochi integration, higher than normal inventory losses at Kochi impacted GRM. Throughput, at 6.4MMT came 1% ahead. Management expects all units to be commissioned by March with FY18 being the first year of full operations.
Outlook and valuations: Best of the lot; maintain Buy
We expect robust Q3FY17 as QTD Singapore benchmark GRM is up 30%.
However, stabilisation of the high-margin 6 MMT Kochi expansion could imply near term misses. The company will undertake capex of R1 trillion across verticals (including its dynamic non-fuel initiatives), which will drive long term earnings. We forecast 8%/19% EPS growth in FY17/18.
The stock currently trades at an attractive 8x FY18E PER with RoE in excess of 30%. We maintain Buy/so with a target price of R755.
Bina, Numaligarh report steady performance, city gas foray positive Bina and Numaligarh reported steady GRMs. Bina reported GRM of $8/bbl with overall PAT of R0.6 billion, while Numaligarh reported GRM of $25/bbl (including excise duty benefit of $15/bbl) with overall PAT of R3.5 billion. BPCL, in 50:50 JV with GAIL, has won the hotly contested North Goa circle in the 6th round of city gas auction.
Q2FY17 concall highlights
Refining performance: Reported GRM – Mumbai: $3.3/bbl, Kochi: $2.8/bbl. Mumbai was impacted mainly by lower crack spreads. Kochi was impacted by stabilisation of Kochi expansion.
Successfully commissioned 10MT CDU at Kochi, secondary units are being commissioned. Higher stock losses at Kochi given higher inventory levels to support integration.
Distillate yield will be low till integration is completed.
Sourcing and slate mix: Management explained that Kochi gets long haul low sulphur crude from Nigeria, and hence inventory impact is higher in Kochi. Refinery will use high sulphur crude after stabilisation.
The refinery can process 60% of its slate from high sulphur crude. Intermediates can be better processed, improving yield post stabilisation.
Stabilisation progress: Crude Distillation unit stabilised and the process of commissioning diesel hydrotreater is under way.
Phase-wise commissioning is expected to be completed by March. Management guided for 70% utilisation in FY17-18. Management guided for $1.5-2.5/bbl higher GRMs on complete stabilisation.
Marketing performance: Robust volume growth across segments. BPCL has increased its bulk market share y-o-y by 100bps to 14%. Management estimates private share at under 5% for petrol and at 5% for diesel. Bulk contracts have a duration of 12-24 months. The company is also undertaking differential pricing selectively which gives a further R0.15 and R0.1 margin in diesel and petrol, respectively.
Capex: R38 billion expended in H1FY17. FY17 target: R120 billion including upstream.
The company has spent R11 billion on its Kochi IREP this fiscal. Further spend of R25-30 billion is likely on the project.
Kochi petrochemical project: Tenders have been awarded and work has commenced. Commissioning now expected by September 2018 versus Jan 2018 earlier.