BPCL reported an EBITDA of Rs 39.2bn in 1QFY17 led by product inventory gains of Rs 12.8bn (refining gains are not disclosed). RPAT was Rs 26.2bn. Results are not comparable owing to inventory and forex impacts.FY16 has been outstanding for OMCs led by (1) Strong GRM, (2) Higher profits in the marketing owing to higher volumes at lower product prices and healthy marketing margins, and (3) Reduced interest burden owing to lower subsidy receivables.Growth in FY17 may be challenging considering the higher base and muted GRM trend in 2Q. The benefits of lower crude prices (balance sheet healing, lower interest cost) are priced in. Expansion in marketing margins is the only trigger left for OMCs. However, up-gradation/capacity expansion (in 4QFY17) of Kochi refinery will be an additional trigger for BPCL.

They remain positive on BPCL owing to its superior refining assets, rising capacity/complexity of Kochi refinery and possible upsides in marketing margins. However, the stock has moved up by ~49% over the past 6-months and we see a correction in the near term (better entry point) led by the weakness in GRM and low chances of inventory gains. Their SOTP target is Rs 650 (4.5x FY18E EV/e for standalone refining, 6.5x EV/e for marketing, Rs 62/sh from upstream and Rs 96/sh from other investments). Maintain BUY.