BPCL: Weak refining weighs on Q3, spotlight on capex, debt ahead
- Despite a strong Q3FY25 with a 37% rise in net profit, BPCL faces challenges as refining margins slide and Russian crude procurement faces uncertainty. The marketing segment offers some relief, but ongoing capex and global supply pressures leave investors cautious.
Bharat Petroleum Corp. Ltd (BPCL) reported 21% year-on-year growth in Ebitda for the December quarter (Q3FY25), thanks to lower crude oil prices, compared to a 65% decline in H1FY25. The state-run oil refining and marketing company’s Q3 net profit rose 37%, but fell short of analysts' expectations due to reduced procurement from Russia and refining margins that came in below forecasts.
BPCL’s refining margin in Q3 dropped to $5.6 per barrel, sharply down from $13.6 per barrel in Q3FY24 and $6.2 per barrel in H1FY25, largely due to a fall in global product prices. However, the marketing segment proved to be a strong performer, with margins improving due to stable domestic retail product prices. As a result, integrated margin (refining plus marketing) remained nearly flat year-on-year at ₹10.4 per litre in Q3, compared to ₹8.5 per litre in H1FY25, according to data from Motilal Oswal Financial Securities.
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Sure, overall margin could have been better, but lower procurement of crude oil from Russia, which is available at a discount of around $3 per barrel, weighed on performance. There is near-term uncertainty with regard to supplies from Russia. BPCL’s management indicated in the call that the share of Russian crude in overall crude sourcing mix is fixed for January and February, but could drop to about 20% in March (31% in Q3FY25 and 32% in Q2FY25). This could put pressure on near-term refining margin even as the marketing business may benefit from stable retail prices.
While greater clarity on Russian supply could provide a boost to BPCL’s stock, investors appear cautious. BPCL shares have fallen about 27% from their 52-week high of ₹376 on 30 September. However, the stock is reasonably valued, trading at an estimated price-to-book ratio of 1.2x for FY26, according to Bloomberg estimates. The stock offers a dividend yield of over 7.5%.
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“We believe past peak earnings are deteriorating owing to a weak refining margin environment in the near term and LPG under-recoveries," said analysts from Nuvama Institutional Equities in a report on 23 January. “Additionally, the high capex cycle also weighs on its return ratios, rendering risk-reward unfavourable," they added.
BPCL has lined-up up ₹1.7 trillion in capital expenditure to meet rising domestic demand across oil and gas, with plans for the next five years. Notable projects include a 3.2 million tonne per annum (mtpa) expansion of its Bina refinery, along with petrochemical integration costing ₹50,000 crore, and a petchem project at Kochi for ₹5,000 crore. These initiatives, expected to be completed by FY29 and FY28, will increase BPCL’s refining capacity to 38.5 mtpa from 35.3 mtpa and expand its petchem capacity to 3.2 mtpa from 0.8 mtpa.
BPCL is also significantly investing in green energy projects as part of its long-term goal to achieve net-zero carbon emissions. The total capex outlay for the next two years stands at ₹45,000 crore, including ₹6,000 crore earmarked for green energy initiatives.
Against this backdrop, investors will watch how debt pans out. The management expects debt/equity ratio to peak at 1.0x which stood at 0.24x at the end of 9MFY25.
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Some analysts remain cautious. “With significant capex planned for FY26-FY28, the company’s FCF visibility remains limited," pointed out Motilal Oswal’s analysts in a report dated 23 January. “However, with marginal volume growth and a spike in capex in the coming years, we reiterate our Neutral rating on the stock," they said.
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