We met BPCL’s management for an update on the oil sector reforms, industry insights and the company’s business outlook. The key takeaways from our meeting are as follows: a) auto fuel pricing power gives stability to earnings, b) LPG reforms will further bring down under-recovery levels, c) BPCL’s brownfield expansions on track, cost effectiveness to boost profitability d) E&P projects monetisation is on track.
We believe the BPCL management has repeatedly proved its capital allocation acumen, as reflected in E&P investment. The acumen is again reflected in its move to insulate earnings growth from the vagaries of policy reforms by setting up a task force to identify key projects across businesses to lead growth through 2020.
We estimate that even with mid-cycle refining margins and additional R1/litre marketing margins, BPCL’s earnings could almost double by FY18. BPCL’s core profitability has improved with auto fuel marketing margin improvement, and the FID (Final Investment Decision) at Mozambique E&P block will be the additional trigger for the stock.
The stock trades at 10.4x FY17E EPS of R81.5 and 1.4x FY17E BV (adjusted for investments). We maintain our ‘buy’ rating.