Bharat Petroleum Corporation - Diesel Margins Surge 43%; Further Expansion Likely; Result Update Q2FY15:: Edelweiss

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Bharat Petroleum’s (BPCL) Q2FY15 profit of INR4.64bn was a large negative surprise, at 50% below our estimates. BPCL incurred INR2.7bn inventory loss due to the 5.3% YoY fall in crude prices and INR3.0bn forex loss. The company’s under-recovery burden was zero though. Faster under-recovery repayments by the government enabled it to prune debt by 18% to INR141bn, thereby reducing interest expense by 60% YoY to INR1.3bn. A further sharp fall in crude oil prices will force a large inventory loss in Q3FY15 as well. Nevertheless, following diesel price decontrol since October 19, 2014, the company increased gross margins to INR1.00-1.09/litre, a 43% spurt. We raise our SOTP-based target price to INR801 (INR697 earlier) following diesel decontrol.

GRMs plunge 68% YoY, 56% QoQ due to USD1.5/bbl inventory hit

GRMs of all 3 refineries were hurt. GRMs of Kochi and Mumbai refineries fell 68% YoY to USD1.48/bbl, while Bina’s GRM dropped 85% YoY to USD1.91/bbl. Overall, the company’s refining margins underperformed that of HPCL due to the substantial inventory loss of INR2.7bn as it carried large inventories at a time crude oil prices fell by 5.3% YoY. Refinery throughput was flat YoY, but rose 14% QoQ as BPCL had a shutdown of 20-25 days in the quarter. While HPCL and IOCL provided for lower depreciation due to increase in useful life, BPCL is yet to do so. This, however, does not change cash flows.

Marketing business: Healthy petrol/diesel volumes, zero subsidy

Under recovery burden was zero versus INR2.2bn in Q2FY14 and INR7.6bn in Q1FY15. BPCL’s marketing volumes fell 7% QoQ and 1% YoY. In the marketing business, petrol sales spurted by 11% YoY and diesel by 2% YoY.

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https://www.edelweiss.in/research/Bharat-Petroleum-Corporation--Diesel-Margins-Surge-43;-Further-Expansion-Likely;-Result-Update-Q2FY15/27602.html