Maintain buy on BPCL as earnings may double by FY18: Motilal Oswal

We met BPCL’s management for an update on the oil sector reforms, industry insights and the company’s business outlook.

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.

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