Buy Bharat Petroleum; target of Rs 715: Edelweiss

Bharat Petroleum Corporation (BPCL) reported in-line Q1FY17 performance with profit of INR 26bn (up 3% QoQ, 11% YoY). While overall GRM, at USD 6.1/bbl (USD 6.3/bbl in Q4FY16, USD 8.6/bbl in Q1FY16), was lower than peers due to lower inventory gains, core GRM was ahead (USD 4.5/bbl versus IOCL/HPCL USD 3-4/bbl). We expect GRM to remain subdued in near term (Q2FY17: USD 5/bbl) as: 1) QTD Singapore GRM is down 12% QoQ; and 2) 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 INR 715 (INR 667 earlier). Maintain ‘BUY’.

We expect a subdued Q2FY17 given that QTD Singapore benchmark GRM is down 12%. Management has guided for flattish GRM for Q2FY17. 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 INR1trn across verticals (including its dynamic non-fuel initiatives), 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 INR 715.