The CCEA of India has approved the sale of the government’s 53.29% stake andtransfer of management control in BPCL, excluding the 61.65% stake BPCL holds in Numigarh Refinery Ltd.(NRL) in Assam (3 mn tonnes/year capacity). The CCEA has also approved the sale of the BPCL holding in NRL along with the transfer of management control to a Central PSU in oil&gas sector, which in our view could be either North east – based upstream company Oil India (holds 26% stake in NRL) or Indian Oil Corporation Ltd, which already operates three refineries in that region. In our view the BPCL stake sale excluding NRL will possibly have a smoother passage. This is because we believe that many potential buyers may not be too keen on taking over NRL, considering legacy political/security concerns over its location in the North East, notwithstanding its superior GRM profile including the excise benefit. We maintain accumulate rating on BPCL on our PE based TP of Rs 512/sh. Pl also refer our 2Q result mote dated November 11, 2019
In a significant decision, the Government has given cabinet approval to transfer government shareholding (53.29%) in BPCL, ex of the Numaligarh refinery (NRL), to a strategic investor. Transfer of management control is positive and will help the government optimize value; potential receipt ~Rs830bn, in our view. The transaction timelines remain tight and are expected to be closed by FY20 end. With ~25% fuel market share in India, BPCL will give a significant foothold in domestic market and we expect interest from range of suitors including global oil majors like Aramco, Rosneft, Shell etc. We remain positive on OMCs given benign crude price environment and value BPCL at Rs600 (Rs537 earlier) based on 8x EV/EBIDTA FY22E.
We are maintaining Accumulate rating on BPCL with revised target price (TP). We have raised our TP by 17.7% to Rs512 based on 10.9x PE on Sept 21E (10% premium to SD+1 reading on 5yr median) after cutting earnings by 25%, 12.5% and 6% over FY20E-FY22E post the 2QFY20 results call with BPCL management. Our TP compares with our DCF value of Rs484 and replacement value estimated at Rs583. Our target PE factors in the potential rerating from the proposed stake sale. The 2QFY20 results were a miss vs. the street and our estimates due to lower than expected normal margins (US$3.38/bbl vs. NBIE estimate of US$5.79/bbl) and inventory and fx loss of Rs260mn and Rs3.9bn, respectively, which we did not include in our forecast. The stock is likely to move based on the progress on government stake sale plans in the coming months, and hence results are likely to have a relatively lower impact. The catalysts for the stock in the run up to the stake sale are (a) the response from global oil & gas majors (b) the control premium expected from potential bidders that will depend on the potential long term fundamental outlook for refining and marketing and (c) whether the government offers BPCL as it is or it is split to separate activities like Numaligarh Refineries and the upstream business, which may not attract buyers and (d) how the deal is structured - in a single tranche or in two phases.
Future developments on privatisation of BPCL will be key to the stock price performance. In the near term, CCEA approval for privatisation and name of potential bidders will play an important role. We are neutral on BPCL at the current juncture given the sharp run-up in stock price and volatility in global GRMs. We have a HOLD rating on the stock with a target price of Rs 515. (based on average of P/BV multiple: Rs 532/share, P/E multiple: Rs 499/share).
We tweak our earnings to factor changes in lower refining margins for H1 and increase marketing margins. During Q2, core performance for BPCL was stable despite forex loss of Rs3.8bn and lower refining profitability. However, benign crude prices and recovery in refining margins is positive for the OMCs and hence we expect a much better H2FY20. State PSUs are also likely to benefit from implementation of IMO2020 effective January given >40% diesel slate. Maintain BUY with a revised PT Rs 537 (Rs 505 earlier) based on 12x PER FY21 given potential rerating from divestment of government stake.
Post the recent surge in BPCL’s stock price, valuation multiples are already pricing in a fully privatized scenario for the business (implied 6.8x EV/e vs. 4.8x assumed in base-case and 6.1x in best case). A further re-rating will depend on potential improvement in earnings and cash flows. This will obviously be realized with a lag and is contingent upon the private player’s ability to drive efficiencies. Our TP is Rs 450/sh (5.5x, 6.0x and 6.0x Sep-21E EV/e for BPCL’s refining, marketing and pipeline businesses + Rs 139 for investments). Downgrade to SELL.
Inventory losses and shutdown of BPCL’s refinery has resulted in a muted 1Q performance. However, we maintain our BUY owing to its impeccable refining assets and healthy free cash flows (Rs 66.55bn) over FY21-22E. For BPCL, core GRMs are expected to improve further by USD 0.5 to 1.0/bbl by FY22E on account of gradual increase in share of heavy and cheap crude at its Kochi refinery. Additionally, restoration of marketing margins as elections have concluded is a key positive. Our SOTP target is Rs 434/share (5.5x Jun 21E EV/e for standalone refining, 6.0x Jun 21E EV/e for marketing, and pipeline business and Rs 129/sh for other investments). Maintain BUY.
Stable crude oil and exchange rate may drive structural changes in pricing of LPG and kerosene, bidding farewell to all under-recoveries. Factoring in the performance of 1QFY20 and the marginal impact of Ind-AS 116, we revise down our EPS estimate by ~16%/12% for FY20/21.BPCListradingat9.1xFY20Econsol.EPSofINR37.7and7.5xFY20E EV/EBTIDA. We value BPCL at 1.9x FY21E PBV multiple. We reiterate our Buyrating with a target price of INR465.
We expect BPCL earnings could be more uncertain than before too with every US$1 change in GRM impacting EPS by 17% in FY20E, which makes us uncertain about its valuation premium. We have assumed US$4.25/bbl=FY20E /US$5.12/bbl=FY21E of total BPCL’s GRM (Current Sing GRM $3.5/bbl in 1QFY20) and gross marketing margin of Rs2.4/ lt. Further, Govt has delayed cooking fuel subsidy payments in FY19 and likely to delay in FY20 also on shortfall of budgeted amount which will increase debt burden of BPCL. We recommend REDUCE with Target Price of Rs 330 on 6X EV/EBITDA of FY21E.
Maintain Sell rating with a target price of Rs300: Weak GRM environment, planned capex and interest costs are set to increase in the coming quarters which will exert pressure on cash flow and lead to increased debt. We remain concerned over the‘regulation’ of ‘deregulated’ products like motor spirit or MS and high speed diesel or HSD.
BPCL Kochi refinery saw throughput of 4.4mmt (+11% YoY, +20% QoQ), in line with the expected stabilization. BPCL has a 10% stake in the prolific Offshore Area 1 in Mozambique. After almost a delay of 4-5 years, the final investment decision is likely to be concluded in 2019.BPCL is trading at 8.2x FY20E consol. EPS of INR47.7. We value BPCL at 1.8x FY21E PBV multiple. We reiterate Buy with a target price of INR452.
We upgrade oil marketing companies (OMC’s) to BUY as we look beyond May 2019, wherein two important factors that determine the fortunes of OMCs gets settled-1) Central elections and uncertainties of policy overhang 2) clarity on Iran sanctions, which will determine trends in international crude oil prices. We believe that the risk-reward for the OMCs are favorable as US-China trade discord and weakening global economy will prevent any sharp rise in crude prices. Post Central elections, risk of government intervention on marketing margins is also likely to come down significantly. As a result, we increase our marketing margin assumptions (from Rs1.75 to Rs2.8/litre for FY20E) and target multiples to 10x PER FY20E against 8x earlier. BPCL/HPCL are top picks.