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Rising capex intensity raises concerns

• BPCL’s EBITDA/PAT came in 12%/11% below expectations in 1QFY26, impacted by lower-than-anticipated GRM (USD 4.9/bbl). However, blended marketing margin stood 25% above estimate at INR8.3/litre (up 75% YoY). Refining throughput and marketing volumes came in line with estimates.
• The Union Cabinet has approved INR300b in LPG compensation to OMCs, which will be paid in 12 tranches. While the disbursement timeline remains undisclosed, we estimate BPCL to receive ~INR37.5b in both FY26/FY27 (25% of total compensation). This will result in a ~5% increase in BPCL’s FY27E BVPS.
• In our previous note, we highlighted that OMCs are entering the last phase of a rally. Since then, BPCL has delivered only 2% return (peak return of 14%). While MS/HSD marketing margins have corrected recently to an average of INR11.3/INR6.7 per lit so far in 2Q (vs. INR12.7/INR11 per lit in 1Q), they are significantly above our assumption of INR3.3/lit. Further, with current LPG underrecovery per cyl declining to INR30 (vs. INR150 in 1Q), the marketing segment should remain strong. Refining segment reported a weak performance in 1Q, as the inventory loss came in significantly above estimate at USD3.5/bbl. In 2Q’td, HSD cracks have risen 34% QoQ to USD13.3/bbl, while MS cracks have declined 23% QoQ to USD8.7/bbl. Fuel oil cracks have again turned negative, averaging - USD4.8/bbl.
• We continue to prefer HPCL over BPCL because of the following factors: 1) HPCL’s leverage towards marketing segment, 2) higher dividend yield, as HPCL’s capex cycle is tapering off while BPCL enters into a new capex cycle, and 3) start-up of HPCL’s multiple mega-projects in the next 12 months providing a push to earnings.
• BPCL currently trades at 1.5x 1yr. fwd. P/B vs. 10-year average of 1.8x. We have a Neutral rating on BPCL.

Key takeaways from the conference call

• Bina refinery expansion: 14% physical progress has been achieved as of Jun’25. INR8b capex has been spent.
• Mumbai refinery upgrade capex: INR142b will be spent. Fluid Catalytic Cracking unit and some other units are being replaced, including the upgrade of a bottom residue unit. Completion is expected in May’29. Work has started on the refinery.
• Capex guidance: INR200b annual capex is expected in FY26, out of which INR23.8b has been spent in 1Q.
• Inventory levels were on the higher side in 1Q, with around 2.9-3mmt of crude oil inventory (usually 2.2-2.3mmt), leading to higher refining inventory loss.
• Russian crude throughput stood at ~34% in 1Q (lower in Jun’25). Discounts were down at USD1-1.5/bbl.
• LPG under-recovery per cylinder fell to INR30 in Sep’25.

Weak refining mars 1Q performance

• BPCL's reported GRM of ~USD4.9/bbl came in below our est. of USD9.0/bbl.
• Refining throughput stood in line with our est. at 10.4mmt (+3% YoY).
• Marketing volumes, excluding exports, were also in line with our est. at 13.6mmt (-1% YoY).
• Marketing margin (including inv.) was 25% above our est. at INR8.3/lit.
• EBITDA was 12% below our estimate at INR96.6b, with marketing inventory loss of INR8.4b and forex gain of INR0.2b.
• LPG under-recovery amounted to INR20.8b (INR32.2b in 4Q).
• Resulting reported PAT stood 11% below our est. at INR61.2b.
• Other income came in 50% above our estimates.
• As of Jun’25, BPCL had a cumulative negative net buffer of INR125.2b due to the under-recovery on LPG cylinders (INR104.5b as of Mar’25).

Valuation and view

• BPCL’s GRMs have been at a premium to SG GRMs because of the continuous optimization of refinery production, product distribution, and crude procurement. The use of advanced processing capabilities of Bina and Kochi refineries allows BPCL to process 100% of high-sulfur crude and 50% of Russian crude.
• We maintain our GRM and marketing margin assumptions. Current marketing margins remain healthy, above the INR3.3/lit we are building in for MS/HSD.
• While valuation appears reasonable and strong marketing performance continues, a muted medium-term refining outlook (our FY26/FY27 PAT estimates are 17%/18% sensitive to every USD1/bbl change in GRM) and the commencement of a new capex cycle emerge as key concerns. Hence, we reiterate our Neutral rating with an SoTP-based valuation of INR310/share.

Highlights from the management commentary 1QFY26 operational performance:

• BPCL has received its first HH-linked cargo. ? 300+ retail outlets, 90+ CNG stations and 831 EV charging stations were added in 1Q.
• Group level debt as of 30 Jun’25 was INR39.5b. ND/E stood at 0.25x and the company had surplus funds of INR17.6b.
• Higher other income was due to high interest income from surplus funds.
• BPRL has contributed profits due to currency fluctuation. JV companies have also performed well.
• BPCL achieved lubricant sales of 78.7tmt in FY26.
• BPCL charges retail margin of INR2/kg to CGDs on gas sales from BPCL’s outlets.

Update on ongoing projects:

• Bina refinery expansion: 14% physical progress has been achieved as of Jun’25. INR8b capex has been spent.
• Mumbai refinery upgrade capex: INR142b will be spent. Fluid Catalytic Cracking unit and some other units are being replaced, including the upgrade of a bottom residue unit. Completion is expected in May’29. Work has started on the refinery.

Mozambique project:

• Some positive news is expected by the company in 2Q. Capex guidance:
• INR200b annual capex expected in FY26 (INR23.8b has been spent in 1Q).
• INR65b for ref/petchem, INR140b for marketing, INR40b for CGD, INR14b for LPG, and INR25b for BPRL.
• FY27 guided capex: INR220-250b. FY28/29 guided capex: INR350b
• Expected D/E would be 1x during peak capex in FY28/29. Refining performance in 1Q:
• Inventory levels were on the higher side in 1Q, at around 2.9-3mmt crude oil inventory (usually 2.2-2.3mmt).
• Russian crude throughput stood at ~34% in 1Q (lower in Jun’25). Discounts were down to USD1-1.5/bbl.
• No issues in payment. The company expects Russian crude proportion to remain similar for entire year.

Marketing segment:

• Robust retail fuel margins led to strong marketing segment performance, even after high marketing inventory losses.
• Under-recovery per cyl: ? 1Q: INR150/cyl ? Jul/Aug’25 INR100/cyl
• Sep’25: INR30/cyl
• LPG compensation:
• Details for compensation disbursement are pending. BPCL’s share will be 25- 26%.
• HSD market share: 29.6%.

CGD segment:

• 2,464 CNG stations operating (840 in own GAs)
• Volumes: own GAs: 339tmt, from ROs: 269tmt

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