Edelweiss gives thumbs up to BPCL; unsurprising results

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Published: September 10, 2016 6:02:27 AM

Bharat Petroleum Corporation Ltd (BPCL) reported in-line Q1FY17 performance with profit of Rs 26 bn (up 3% q-o-q, 11% y-o-y).

While GRM is likely to remain subdued in near term, the Kochi expansion will enhance refining margins (PTI)While GRM is likely to remain subdued in near term, the Kochi expansion will enhance refining margins (PTI)

Bharat Petroleum Corporation Ltd (BPCL) reported in-line Q1FY17 performance with profit of Rs 26 bn (up 3% q-o-q, 11% y-o-y). While overall GRM, at $6.1/bbl ($ 6.3/bbl in Q4FY16, $8.6/bbl in Q1FY16), was lower than peers due to lower inventory gains, core GRM was ahead ($4.5/bbl versus IOCL/HPCL $3-4/bbl). We expect GRM to remain subdued in near term (Q2FY17: $ 5/bbl) as: QTD Singapore GRM is down 12% q-o-q; and range-bound oil price will limit inventory gains. However, diesel retail margins have surged 33% QTD. On structurally higher GRMs post Kochi expansion, we raise our target price to Rs 715 (Rs 667 earlier). Maintain buy.

In-line refining performance

GRM of $6.1/bbl (down 3% q-o-q, 29% y-o-y) came in line with our estimate of $6.0/bbl. Management highlighted inventory gain of ~$1/bbl, implying core GRM of $5/bbl. Throughput, at 6.2MMT, also came in line.

Bina and Numaligarh report robust performance

Bina and Numaligarh reported strong GRMs. Bina reported GRM of $14.5/bbl with overall PAT of Rs 3.6 billion, while Numaligarh reported GRM of $9.05/bbl with overall PAT of R5 billion.

Outlook and valuations: best of the lot; maintain buy

We expect a subdued Q2FY17 given that QTD Singapore benchmark GRM is down 12%. However, commissioning of the high-margin 6MMT Kochi refinery expansion by end of the year will structurally enhance refining margin. The company will undertake significant capex of Rs 1 trillion across verticals, which will drive long term earnings. We forecast 19%/11% EPS growth in FY17/18. The stock currently trades at an attractive 7x FY18E PER with RoE in excess of 29%. We maintain buy/so with a target price of Rs 715.

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Q1FY17 con-call takeaways

GRM guidance: Given the trend of Singapore margins, management guided for a more subdued Q2FY17 with GRM of $5-6/bbl.

Kochi expansion: Management guided for Q4FY17 as the first quarter of full commissioning and expects to achieve 70% utilisation in the first year of operation. Post expansion, BPCL will earn $2/bbl higher GRMs from its earlier benchmark.

Capex guidance: Management guided for FY17 capex of Rs 130 billion. Of this, R50 billion is earmarked for Kochi.

Mozambique: Management stated final agreement with Mozambique is yet to be signed. They now expect the FID by mid-2017 and investments to commence immediately thereafter.

Brazil: Appraisal is under way and should be completed by end of the year. Approvals should commence in FY17.

Russian acquisitions: BPCL has signed the HoS and final due diligence is under way. Both fields are producing and therefore revenue will start accruing once acquisitions are finalised.

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