Bharat Petroleum Rating ‘Buy’; No divestment premium in current price

Given capital efficiency, stock’s outperformance over OMC peers is likely to resume; ‘Buy’ retained with revised TP of Rs 540

It has also underperformed IOCL by 40%/17%. While the large special dividend paid in Sep-21 has offset a part of the stark underperformance, we note that BPCL outperformed HPCL/IOCL 97%/241% over the last decade.
It has also underperformed IOCL by 40%/17%. While the large special dividend paid in Sep-21 has offset a part of the stark underperformance, we note that BPCL outperformed HPCL/IOCL 97%/241% over the last decade.

After its recent correction, BPCL’s stock has underperformed HPCL/IOCL by 31%/17% over 2 years. Its current fwd P/B multiple is the lowest in 7 years and at a 20% discount to the multiple in CY19 before the government announced its privatisation intent. With valuation favourable (1.6x fwd P/B vs last cycle peak of 3.5x), we expect its outperformance over OMC peers to resume on higher capital efficiency. Buy with Rs 540 PT to play the refining cycle recovery.

BPCL stock underperformance: The stock has corrected 26% from its recent peak and is now down 3%/28% in the past 1-yr/2 yrs. It has underperformed HPCL by 41%/31% on 1-yr/2-yr basis. It has also underperformed IOCL by 40%/17%. While the large special dividend paid in Sep-21 has offset a part of the stark underperformance, we note that BPCL outperformed HPCL/IOCL 97%/241% over the last decade.

No privatisation premium in current price: BPCL’s current fwd P/B of 1.6x is lower than where it used to trade at (2x) before the Centre’s Nov-19 announcement of its intention to privatise it.

Best return ratios in OMC pack: BPCL’s capital efficiency is the highest in the OMC pack, which helps it deliver a full-cycle ROE of 24% vis-a-vis 22% for HPCL and 14% for IOCL. This is attractive in light of the benign valuation reflected by current price (1.6x 1-yr fwd P/B).

Marketing performance should improve on 30% RO additions since FY20: The company has added 4,450 retail outlets (RO) over FY20-H1FY22, expanding its network by 30%. However, with repeated restrictions from the pandemic, its auto fuel volume is lower than in FY19. We expect marketing volume growth to accelerate once the pandemic subsides, driving growth in core marketing Ebitda.

Most judicious capex programme among OMCs: BPCL’s capex run rate is the lowest among the OMCs, as it has refrained from undertaking greenfield refinery projects, unlike its peers. With ongoing projects focused on improving the value-added mix of products in its output, capital efficiency should continue to lead its peers.

High earnings sensitivity to GRM revival: China’s zero-Covid strategy has resulted in travel curbs that have weighed on its diesel demand (Sep-21: -11% from Sep-19). India’s diesel demand is tracking lower than the 2019 level, on lower use of public transport and lower industrial demand. Diesel demand recovery in China and India in H2CY22E could anchor a sustainable recovery in refining margins. BPCL’s EPS increases 15% for every $1 improvement in GRM.

Marketing in a sweet spot: The sharp correction in crude and flat retail prices have resulted in marketing margins on diesel and gasoline rising above the normative level of Rs 3/lt. This has created room for likely reduction in retail prices in the run-up to polls in Feb-22.

Early stage of refining cycle recovery: BPCL’s underperformance has taken out all the premium from a potential privatisation event. It trades at an attractive 1.6x P/B. Reiterate Buy with PT of Rs 540—at 7x fwd EV/Ebitda.

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