Analyst Corner: ‘Hold’ on BPCL; keep faith in refining turnaround

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Published: February 22, 2020 2:00:07 AM

Volume performance was mixed too, with share in LPG & ATF up and petrol steady but diesel down ~60bps q/q that management indicated has since reversed in Jan as discounts by competitors have ebbed.

bpcl,petroleum sectorBPCL’s Q3FY20 Rs 12.06 bn standalone net came 41% below JEFe despite inline inventory gains (Rs 5.4bn) and forex losses (Rs 0.9 bn).

BPCL’s Q3FY20 net of Rs 12.6 bn was well below JEFe hurt by weak operational performance yet again. Core Ebitda missed by 36%, e.g., with refining and marketing margins weak with share losses in diesel too although debt did ease q/q. Looking ahead, we still hope for that elusive refining turnaround with upside risk to auto fuel marketing margins too but its richer-than-peer valuations that already bake in some of the divestment upside predicates our ‘hold’ rating.

BPCL’s Q3FY20 Rs 12.06 bn standalone net came 41% below JEFe despite inline inventory gains (Rs 5.4bn) and forex losses (Rs 0.9 bn). Lower other income (-32% q/q) hurts as did higher-than-expected interest costs although debt did ease Rs 17 bn q/q helped by lower w-capital and ~Rs 9 bn in subsidy payments late in December.

Much like in most recent quarters, though, it is BPCL’s core performance that was more disappointing, with core Ebitda (Rs 19 bn, -22% q/q, -43% y/y) some 36% below JEFe as both refining and marketing missed handily led by lower margins. In marketing, e.g., auto fuel margins eased 6% q/q but were still well above normal but were offset yet again by soft realised industrial margins despite our trackers suggesting an uptick. Volume performance was mixed too, with share in LPG & ATF up and petrol steady but diesel down ~60bps q/q that management indicated has since reversed in Jan as discounts by competitors have ebbed.

Like before, though, refining frustrated us more. Crude runs rose after a soft Q2FY20 but sadly not margins. Yields did ease a tad q/q and diesel exports would have hurt too but $2.2 in blended core margins and an even lower $2 at Kochi still sounds unconscionable especially after BPCL spent `165bn to expand and upgrade it. Some of this rests on the adverse macro, though, but LH differentials may not worsen, Mid-East OSPs may now ease and freight costs have fallen too. We keep our faith in a refining turnaround, therefore, also noting likely uplift from the elusive IMO as FO inventories normalise with upside from BS-VI premiums

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