Divestment a key catalyst; FY21/22e EPS up 70/12% on results and low base; TP raised to Rs 515; ‘Buy’ retained; preferred OMC
Similar to HPCL, BPCL also reported strong Q1. Refining was weak and the outlook remains weak. But, marketing was much stronger despite lower volumes. Apart from windfall gains in Apr-May, and inventory gains, realised margins were also higher.
OMCs have surprised on marketing; may do well unless oil prices spike
While refining was weak, we were more concerned over marketing. As oil price declines were not passed on (rather taxes were increased), retail petrol/diesel are near-peak at oil prices of ~$40-45/bbl. After 84 days of no price changes, OMCs had surprised us with Rs 9-11/L hike in petrol/diesel prices in June. Price hikes remain difficult (since 29 June, petrol prices frozen; modest change in diesel).
While the pricing policy is disappointing, we continue to believe subsidies will not return and OMCs can make normalised margins on a full-year basis (unless oil prices spike). And, driven by the benefit of lower oil prices, OMCs may surprise with higher realised margins.
Divestment a key catalyst
Due to COVID-19, the divestment process has seen delays, and the Expression of Interest (EOI) deadline is now pushed to 30-Sept. The Centre is keen to complete the process by FY21F. Unless, the pandemic further disrupts, we are optimistic it can be completed in 1H21.
Raise FY21/22F earnings significantly and TP to Rs 515
Driven by strong Q1, and higher marketing earnings, we raise our FY21/22F Ebitda by 36%/9%, but earnings by higher 70%/12% due to lower base. We continue to value refining at 5x FY22F EV/Ebitda. But, with more confidence over privatisation, we now assign a higher 6x FY22F EV/Ebitda (earlier 5x) to marketing (vs 5x for HPCL/IOCL). Our SoTP value is Rs 325/sh (earlier Rs 280). We assign an option value of Rs 190 (earlier Rs 110) to derive our higher TP of Rs 515 (25% upside potential).
Driven by divestment news flow, BPCL has significantly outperformed peers (1Y: BPCL+20%, HPCL -12%, IOC -31%, Nifty 3%). We think the outperformance may sustain as privatisation should reduce the overhang of government interference in pricing/capital allocation, bring synergy benefits and drive re-rating. We maintain our Buy rating. The stock trades at 10.6x FY22F EV/Ebitda and 1.8x FY22F P/B.