BPCL: Surprisingly positive GRMs in Q1::Centrum

Surprisingly positive GRMs in Q1
Unlike other OMCs and standalone refiners, BPCL reported positive GRMs for
Q1 at US$2.6/bbl owing to better inventory management. However, the
company suffered a loss of Rs88.4bn due to lack of support from the
government, forex losses and higher interest burden. BPCL’s Bina refinery
utilisation was at 1.4mmt (over 96% capacity utilisation) and the company is
confident of utilising the capacity fully in FY13E. We remain positive on
BPCL’s E&P success and hence maintain ‘Buy’ rating on the stock.
Revenue jump by 18.2% YoY: BPCL reported 18.2% YoY jump in revenues at
Rs545.5bn primarily on account of both higher product prices and 8.6% YoY
jump in volumes. Throughput during Q1 jumped by 13.7% YoY at 5.9mmt as
during 1QFY12, BPCL had taken a shut down in its Kochi refinery. Petroleum
product sales jumped by 8.6% YoY at 8.5mmt on the back of strong demand
for diesel (15.4% YoY increase) and LPG (8.5% YoY increase).
Better inventory management leads to positive GRMs yet no
compensation from the government; forex losses and higher interest
cost impact the PAT: Unlike other OMCs and standalone refiners, BPCL
reported US$2.6/bbl (positive) average GRMs on the back of better inventory
management. The company had 50% less crude inventory at the end of March
2012 compared to its normal levels. It was thus able to report US$1.6/bbl and
US$4.0/bbl GRMs for its Mumbai and Kochi refineries respectively. The
company received a benefit of US$1.0/bbl due to octroi reversal for its
Mumbai refinery. BPCL received subsidies of Rs36.6bn from upstream
companies. However, devoid of any compensation from the government, it
had to absorb losses of Rs79.6bn, impacting profitability. The company also
incurred forex loss of Rs16.0bn due to the wide fluctuation in rupee-dollar
exchange rate during the quarter. Borrowings surged to Rs286bn thus
pushing up interest cost by 55.4% YoY at Rs5.2bn. Thus BPCL reported a huge
loss of Rs88.4bn in Q1FY13.

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Near term outlook negative, yet confident on success of E&P: BPCL’s Bina
refinery operated at about 96% utilisation rate (1.4mmt) during Q1 and is
expected to operate at 100% capacity in coming quarters. BPCL’s near term
performance is likely to be impacted by government compensation issues. Yet
we remain optimistic over its success in E&P and hence like the stock.
Currently, the expected recoverable reserves from Mozambique are about 30-
60tcf which will be certified in 2013. Also, the success in Brazil could throw up
some positive surprises. The company is increasing its investment in E&P with
a planned capex of over US$300mn and US$400mn in FY13E and FY14E
respectively. We continue to like BPCL due to the value from its E&P and
maintain ‘Buy’ with a price target of Rs455.