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Bharat Petroleum Corp. Ltd’s (BPCL’s) December quarter (Q3FY22) earnings announced on Monday were below expectations. The state-run oil marketing company’s (OMC’s) standalone Ebitda, or earnings before interest, taxes, depreciation and amortization, stood at 4,213 crore in Q3, down 2% year-on-year and 6% sequentially.

“BPCL’s Q3 Ebitda and profit after tax were significantly below our and consensus estimates due to marketing inventory loss on account of excise duty cut with effect from 4 November 2021," said analysts from JM Financial Institutional Securities Ltd in a report. “Further, impl-ied core marketing margin seems to be weaker than expected," they said.

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As such, BPCL’s shares have declined by 3.8% since the results vis-à-vis a 2.5% drop in the Nifty50 index. It must be noted that the refining environment remains strong and therefore, investors can expect the refining business to perform well in the near-to-medium term. BPCL’s refining segment did well in Q3, reporting gross refining margin (GRM) of $9.7 per barrel, higher than estimates.

While that augurs well, a key factor for BPCL investors to watch is the progress and timeline on the potential divestment of the government’s 52.9% stake in the company. As things stand, BPCL’s privatization is not expected this fiscal year and will be pushed forward to FY23.

“Limited progress has been made in divesting BPCL’s upstream portfolio or in selling down its holdings in Petronet LNG and Indraprastha Gas. Government is also disincentivizing petrol and diesel with excise duties at historical highs while subsidizing city gas distribution players," said analysts from Jefferies India.

Further, crude oil prices are strong, with Brent crude flirting with $90 per barrel. With upcoming elections in Punjab and Uttar Pradesh, analysts reckon OMCs will refrain from increasing retail prices of petrol and diesel.

This could adversely impact their marketing margins.

To be sure, BPCL’s shares have lagged those of peers, Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC) in the past one year. As such, the large special dividend paid in September does compensate for BPCL’s underperformance to that extent. The silver lining is that BPCL stock’s valuations are relatively undemanding. Needless to say, investors would follow privatization news flow closely hereon and the potential valuations that the deal would fetch eventually

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