Strong Q4 performance, robust cash flows and outlook to support BPCL stock

Attractive valuations and robust cash flows are the other positives

Public sector undertaking oil marketing major BPCL beat Street expectations and surprised analysts with excellent results. The company reported an operating profit of Rs 11,100 crore in the fourth quarter of the 2022-23 financial year or Q4FY23 (vs Rs 4,200 crore quarter-on-quarter or QoQ and Rs 5,900 crore year-on-year or YoY).
 
The beat was driven by far better than expected gross refining margins (GRM). The adjusted net profit was at Rs 7,800 crore (Rs 2,000 crore QoQ, Rs 2,500 crore YoY) while the reported bottom line was Rs 6,500 crore, as BPCL recorded an impairment of Rs 1,400 crore on its investment in BPRL.
 
The reported GRM for the quarter was at $20.7/bbl against expectations of Rs 13/bbl. Adjusting for export taxes (at an estimated $ 9/bbl), the realised GRM is likely to be around $ 16.7/bbl. Although GRMs have moderated in Q1FY24, the marketing margins on petrol, diesel and LPG have more than compensated by strong recoveries.
 
The strong performance was driven by the Bina refinery’s GRM being $26.1/bbl while Kochi increased to $22.5/bbl, and Mumbai was at $15.6/bbl. Kochi processed over 90 per cent heavy sulphur crude after maintenance shutdowns and overhauls in Q3FY23. The Russian crude blending during the quarter was closer to 30 per cent and assuming an average discount of $12/bbl, the blend contribution could be Rs 2,200 crore. The crude throughput was 10.6 MMT (+13 per cent QoQ, and 5 per cent up YoY).
 
However, inventory losses would have amounted to Rs 1,900 crore, due to falling crude prices during Q4. During the quarter, BPCL gained market share (while IOCL and HPCL lost share) in diesel by 32 basis points (bps), while on YoY basis the gain was 196 bps. In petrol, BPCL gained 7 bps market share QoQ, while it increased by 70 bps YoY.
 
Despite the struggle in the first half of FY23, when crude and gas prices spiked sharply due to supply concerns after the Ukraine-Russia war, BPCL generated operating cash flow of Rs 10,600 crore for FY23. The company had a capex of Rs 8,100 crore for the year and closed with net debt of Rs 38,300 crore compared to Rs 36,300 crore in March 2022 and after hitting a peak of Rs 52,200 crore net debt in September, 2022.
 
BPCL recognised an impairment of Rs 1,360 crore on its upstream business under Bharat Petro Resources (BPRL). The carrying value of the investment was Rs 9,600 crore. The subsidiary has recognised an impairment on its Mozambique asset during Q4, which led BPCL to recognise the impairment. The book value of the stake in BPRL is Rs 6,200 crore.
 
Assuming oil prices at $75/bbl, and blending of discounted Russian crude at elevated levels of nearly 40 per cent and record LPG margins, the blended margin for BPCL is at record high.
 
Although this may moderate, it should be a strong margin through the next two financial years. The company will incur capex of Rs 10,000 crore for FY24 and over next two or three FYs, it will undertake Rs 50,000 crore capex for an ethylene cracker at its Bina refinery.
 
But cash flow and debt levels appear comfortable enough to sustain the project without balance sheet stress. If the crude cycle has moderated, and there are no supply shocks going forward, the stock is attractively valued at single digit enterprise value to operating profit.
 
Valuations from analysts will vary along with their assumptions of marketing margins and GRMs. While most analysts are positive, target valuations for the stock range between Rs 390 and Rs 529, with a few analysts indicating the stock may be fully-valued at the current price of Rs 366.