Bharat Petroleum refining strength offsets marketing losses as LPG under-recoveries surge

Investment View and Valuation

Motilal Oswal Financial Services retained its Neutral rating on Bharat Petroleum Corporation Limited (BPCL) and maintained its sum-of-the-parts-based target price of Rs 330, compared with the current market price of Rs 310. The broker views BPCL’s strong refining performance and crude-sourcing flexibility positively, but considers weak near-term marketing economics and a new capital-expenditure cycle to be key concerns.

Motilal Oswal values BPCL’s core business at 6 times December 2027 estimated EBITDA and its city gas distribution business at 15 times FY28 estimated EBITDA. The valuation also includes investments such as Mozambique LNG and other upstream assets. BPCL traded at 1.1 times FY28 estimated price to book value, with estimated FY28 return on equity of 14.6 per cent.

1QFY27 Financial Performance

BPCL’s 1QFY27 standalone operating loss of Rs 40.8 billion was substantially lower than Motilal Oswal’s estimated EBITDA loss of Rs 123.3 billion. Reported loss after tax was Rs 39.6 billion, compared with the broker’s estimated loss of Rs 103.4 billion.

Clean PAT, adjusted for forex loss, marketing inventory gain and impairment loss, was Rs 62 billion, 25 per cent above the broker’s estimate. The better-than-expected performance was driven principally by refining.

Refining Performance and Crude Flexibility

Refinery throughput was in line with expectations at 10.2 million metric tonnes, while marketing volume excluding exports was 13.6 million metric tonnes, 4 per cent below Motilal Oswal’s estimate. Strong diesel and aviation turbine fuel cracks, together with an approximately 84 per cent middle-distillate yield across BPCL’s refineries, supported refining profitability.

Bina achieved an approximately 87 per cent middle-distillate yield and a gross refining margin of about US dollars 57 per barrel before export duty and cess. Mumbai and Kochi refinery margins were US dollars 34 and US dollars 39 per barrel, respectively. Motilal Oswal attributes BPCL’s premium to Singapore gross refining margins to optimisation of refinery production, product distribution and crude procurement.

Bina and Kochi can process 100 per cent high-sulphur crude and 50 per cent Russian crude, supporting BPCL’s ability to optimise its crude slate.

Management Commentary and Operating Indicators

Management highlighted BPCL’s flexible sourcing strategy amid market disruptions. Spot crude purchases represented 69 per cent of total sourcing in 1QFY27, compared with 44 per cent a year earlier. Russian crude accounted for 38 per cent of procurement, compared with 31 per cent in 4QFY26.

BPCL had secured its crude requirements through August 2026 and was sourcing for September. Management stated that the differential between BPCL’s landed crude cost and the benchmark was US dollars 13-15 per barrel after the war, compared with US dollars 4-5 per barrel before it.

• The retail network reached 25,485 outlets.
• Retail productivity was industry-leading at 157 kilolitres per outlet per month.
• City gas distribution sales increased 60 per cent year on year to 85 thousand metric tonnes.

Marketing Pressure and LPG Under-Recoveries

Marketing remains the principal near-term risk. Domestic LPG under-recovery increased to about Rs 510 per cylinder in 1QFY27 from about Rs 80 per cylinder in 4QFY26, and remained elevated at Rs 490 per cylinder in July 2026. BPCL’s cumulative negative LPG buffer stood at Rs 158 billion at June 2026.

Motilal Oswal expects higher crude prices of US dollars 90-100 per barrel amid geopolitical tensions, along with elevated fuel cracks, to keep marketing margins under pressure. The broker also flags the risk of higher Special Additional Excise Duty on petrol, diesel and aviation turbine fuel, although government support for oil marketing companies remains possible.

The Ministry of Petroleum and Natural Gas approved Rs 75.9 billion of compensation for domestic LPG under-recoveries through March 2026. BPCL recognised Rs 19 billion from three instalments during the quarter.

Capital Expenditure and Growth Projects

BPCL maintained its FY27 capital-expenditure guidance of Rs 250 billion and spent Rs 44 billion in 1QFY27.

The Bina refinery expansion and petrochemical project was 30.7 per cent complete. BPCL had incurred Rs 59 billion and placed commitments of Rs 300 billion. Geopolitical and supply-chain issues caused delays, although management indicated that there was no material effect on the project’s critical path.

Longer-Term Growth Drivers

Mozambique LNG first gas is expected in FY29. BPCL’s Phase I entitlement is approximately 1.3 million metric tonnes per annum, with expected annual pre-interest, pre-debt-repayment cash flow of about US dollars 350 million at US dollars 65 per barrel crude.

Brazil upstream first oil and gas are expected in FY31 and FY32, respectively. These projects, together with BPCL’s refining capabilities, crude-procurement flexibility and city gas distribution operations, form part of the longer-term valuation and growth outlook.

Key Risks

• Weak domestic marketing economics and elevated LPG under-recoveries could continue to weigh on profitability.
• Higher crude prices and fuel cracks may keep marketing margins under pressure.
• A potential increase in Special Additional Excise Duty on petrol, diesel and aviation turbine fuel remains a risk.
• Geopolitical and supply-chain disruptions could delay the Bina refinery expansion and petrochemical project.
• BPCL is entering a significant capital-expenditure cycle, with FY27 guidance of Rs 250 billion.