ICICI Securities: Reiterate ‘buy’ on BPCL with target price of Rs 494

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Published: September 24, 2019 3:25:56 AM

The tax rate cut announced points at big bang reforms; privatisation of BPCL would help make up for fall in tax revenue in FY21, if not FY20.

However, a risk here is that GoI, instead of privatising BPCL, may sell its stake to IOC to meet the FY20 divestment target. However, a risk here is that GoI, instead of privatising BPCL, may sell its stake to IOC to meet the FY20 divestment target.

We have been optimistic about privati-sation of Bharat Petroleum Corporation (BPCL) as legal hurdles were cleared in 2016 and due to recent GoI actions suggesting it wants private competition to rise in auto fuel marketing. The finance minister in her Budget speech and DIPAM secretary in a media interview, have talked of strategic sale of PSUs to the private sector. The tax rate cut announced points at big bang reforms; privatisation of BPCL would help make up for fall in tax revenue in FY21, if not FY20. However, a risk here is that GoI, instead of privatising BPCL, may sell its stake to IOC to meet the FY20 divestment target. Nevertheless, we ascribe at least a 50% probability to privatisation, to reflect which we raise the target price for BPCL to Rs 494 (22% upside).
Reiterate BUY.

Optimistic of privatisation: We have been optimistic that BPCL would be privatised as, legal hurdles, which led to HPCL and BPCL privatisation falling thro-ugh in 2003, was cleared in 2016, GoI formed an expert committee in Oct’18 to suggest ways to increase competiti-on from the private sector in transporta-tion fuel marketing (privatisation is the quickest way to take politics out of auto fuel pricing), the FM in her Budget speech said that GoI would offer PSUs for strategic investment by the private sector, DIPAM secretary said in a media interview that strategic sale of PSUs to private players would soon happen.

More optimistic of privatisation after tax rate cut: We are even more optimist-ic about the privatisation of BPCL on thr-ee grounds. First, the latest tax rate cut and roll-back of stockmarket related tax-es suggests GoI is finally doing big bang reforms, which are welcomed by invest-ors. Second, the latest income tax rate cut would lead to large loss of revenue for GoI, which could be made up by the privatisation of BPCL. And thirdly, privat-isation would improve the broader market sentiment.

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