Stock correction limits downside in BPCL; Q3 performance meets expectations

Bharat Petroleum Corporation Limited’s (BPCL’s) financial performance during the third quarter of financial year 2025 (Q3FY25) was largely in line with market expectations. Weaker refining performance was offset by strong marketing margins. Operating profit was 6 per cent below estimate with forex and marketing inventory loss (total Rs 1,000 crore). The sharp rise in operating expenditure in Q3FY25 was due to employee dues amounting to Rs 370 crore.

 

BPCL’s reported gross refining margins (GRMs) stood at $5.6 per barrel or bbl ($4.4/bbl in Q2FY25).

 

Refining throughput was 9.5 metric million tonnes or mmt (-3 per cent Y-o-Y). Marketing volumes, excluding exports, were at 13.4mmt (+4 per cent Y-o-Y). Marketing margin (including inventory) was at Rs 7.4 per litre (vs Rs 5.8 per litre in Q2FY25). Operating profit stood at Rs 7,580 crore with marketing inventory loss and forex loss amounting to Rs 720 crore and Rs 270 crore respectively. LPG under-recovery amounted to Rs 3,110 crore. The reported net profit was in line with our estimate at Rs 4,650 crore.

 

For 9MFY25, net sales were flattish at Rs 3.3 trillion as compared to the year ago quarter, while operating profit and net profit declined 49 per cent and 55 per cent respectively to Rs 17,800 crore and Rs 10,100 crore. In Q4FY25, net sales, operating profit and net profit may decline by 23 per cent, 58 per cent and 68 per cent Y-o-Y respectively. As of December 2024, BPCL’s debt stood at Rs 19,620 crore vs Rs 21,530 crore as of September 2024.

 

Given trends, Russian crude proportion at discount could decline from the current 31 per cent. If it goes to zero, there will be an estimated $1/bbl impact on GRM.

 

On a sequential basis, LPG prices are stable, and under-recoveries should taper off from Q1FY26 onwards. Marketing margins at Rs 9/litre motor spirit (MS) and Rs 5 per litre for high speed diesel (HSD) are robust.

 

Russian crude utilisation stood at 31 per cent in Q3 (vs 35-40 per cent historically). While Russian crude cargos are available for Jan-Feb’25, there is likely shortage for Mar’25. Management believes this is transient and shall normalize in 2-3 months.

 

In Q3FY25, LPG under-recoveries at Rs 3,100 crore came in 50 per cent higher quarterly than reported in H1FY25 (Rs 2,000 crore in Q1 and Rs 2,100 crore in Q2). LPG under-recovery is expected to be in the range of Rs 1,000 crore per month. There is a strong probability the government will provide compensation to OMCs against LPG under-recovery.

 

There is ongoing refinery expansion which will constrain free cash flow (FCF) generation. The Bina refinery expansion (3mmt refining and petchem capacity each), at a capex of Rs 49,000 crore is underway, with the majority of the expenditure scheduled for next two financial years. While only Rs 6,100 crore has been approved for the Andhra Pradesh refinery project, a total of Rs 95,000 crore capex may be incurred. Another 26 compressed bio gas or CBG plants are planned over three years at a capex of Rs 2,500 crore.

 

Annual capex of Rs 20,000 crore is expected in FY26. Capex shall increase from FY27 to Rs 25,000 crore or more. The five-year capex plan is Rs 1.7 trillion, of which Rs 1.3 trillion is already approved by the Board.

 

During FY 25-28, a total of 715 city gas distribution or CGD station additions are planned. Administered pricing mechanism allocation is 49 per cent. Spot R-LNG is to be purchased for the remaining volumes.

 

In December 2024, BPCL had a cumulative negative net buffer of Rs 7,230 crore due to the under-recovery on LPG cylinders (Rs 4,120 crore as of September 2024). The Board declared an interim dividend of Rs 5 per share.

 

Marketing inventory loss in Q3 amounted to Rs 720 crore. BPCL maintains a 25-27-day inventory. While GRMs will stay at premium over Singapore, there is a weak GRM trend in Asia and this may lead to lower GRMs in Q4FY25.

 

Given the correction in the share price, the stock has limited downside. But volume expansion is limited until capex is complete and free cash flow will be limited due to the capex.