Morgan Stanley rates BPCL as ‘overweight’; eyes paradigm change

By: | Published: August 8, 2016 6:07 AM

BPCL looks to leverage its marketing network for the purpose

Bharat Petroleum Corporation Limited (BPCL) suggested that based on global experience, as market deregulation evolves, non-fuel business becomes a key differentiator. In Europe, for example, it accounts for 50% of store sales and a major part of profitability because fuel business margins face hypercompetition. Though India is at a very early stage, BPCL wants to leverage its existing marketing infrastructure and reach of 120 m unique customers to get ready for potential transformational change.

No material impact on either near-term profitability or capex allocation: Management suggested that these initiatives are not capital-intensive (R1- 1.5m/outlet) and are unlikely to have a meaningful impact on near-term profitability. However, they will help BPCL to enhance its brand/retail proposition to customers, eventually helping to lift market share.

Below are the four key focus areas for these non-fuel initiatives

(i) Rural marketplace: Targeting rural customers, the idea is to use rural retail outlets and a digital platform to provide service offerings related to assisting eCommerce, agri advisories, vocational education, etc.

(ii) Integrated fleet management: BPCL believes that the fragmented road transport industry is fraught with challenges. It is looking to use a digital platform to provide end-to-end solutions for fleet operators and shippers through strategic partnerships with domain experts through services like freight exchange to improve fleet productivity, vehicle maintenance, and driver management.

(iii) Personal travel offering: Using the mobile app (Happy Roads), the target segment is the urban class, assisting them to travel to new destinations by bridging the gap of local information, basic facilities,and emergency services. Currently a pilot is being run in Bengaluru. The target is to scale it to top 18 cities covering 200 destinations and 72 highways.

(iv) Urban household solutions: BPCL is looking to leverage its access to>100m urban retail customers and LPG households and become a one-stop, omni channel shop for regular household needs across goods and services.



Our PT of Rs 749 is our base case scenario value, derived from SOTP. Risks to achieving our PT include the following: We value the core refining and marketing business at a P/E ratio of 9x our F18 estimate. This is at a 10% discount to our 10x P/E benchmark for global refining and marketing companies, to factor in any risks related to SKO and LPG subsidies. We value the company’s listed investments at a 15% discount to current market price, to reflect risks associated with market volatility. We value unlisted/JV investments at F16e P/B of 1.0x.

Risks to achieving our price target include the following: (i) Any exploration setback at the company’s Mozambique asset could lower the estimates for recoverable resources. (ii) Intense competition from private companies in fuel marketing could lead to greater erosion of volumes and lower marketing margins (iii) Lower gross refining margins and higher inventory/forex losses could be negatives.

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