Bharat Petroleum to gain most from fall in diesel under-recoveries

Written by fe Bureau | Mumbai | Updated: Sep 3 2014, 07:17am hrs
With the difference between the sale price and the market (non-subsidised) price of diesel dropping to a historic low of 8 paisa/litre on Monday, analysts believe that Bharat Petroleum Corporation (BPCL) is likely to gain the most from the falling under-recoveries.

Analysts cite cheaper valuations and stronger refining performance as key positives for the stock. We prefer BPCL, where core performance is the strongest, with the stock at 11x P/E under such a scenario despite the 65% price rise in 2014, Barclays said in a report. While BPCLs valuations have moved higher to 12.9-times its one-year trailing earnings since the Barclays report was released, the stock trades below HPCL (14.5-times) and IOC (13.1-times).

YTD, BPCLs share prices have doubled with the scrip hitting an all-time high of Rs 711.65 on Tuesday. Meanwhile, IOC and HPCLs shares have gained 79.56% and 98.67%, respectively, YTD. The BSE benchmark Sensex has rallied 27.6% during the same period. Experts say the fall in under-recoveries could boost the EPS of the OMCs. As monthly resets continue, we expect overall under-recoveries to fall 36% by FY16 from Rs 1.4 lakh crore in FY14, creating the possibility of a firm resolution of the subsidy issue for the first time in over a decade. BPCL, where EPS could rise 25% from base case and ROEs are strong, is our top pick among downstream SOEs, said Barclays.

The under-recovery for FY15 are projected at Rs 91,665 crore; 34% lower than Rs 1,39,869 crore in FY14. Meanwhile, BPCLs net under-recovery in FY14 stood at Rs 511.50 crore. HPCL absorbed under-recovery of Rs 482 crore, while IOCLs unmet recovery stood at Rs 1,083 crore.