BPCL: Scaling up proven model

6 Feb 2024 , 11:17 AM

Recommendation: Buy; Target price: ₹700

BPCL is investing Rs1.5trn over next 5 years to step up refining capacity by 9%, set up 2.2m MT integrated polymer unit, E&P blocks, CGD networks and expansion of core marketing infra to de-risk revenue model; by FY28/29 share of R&M is seen lowering to 60% in Ebitda vs ~100% now. It should also benefit from opportunistic oil sourcing, growth in POL consumption and recovery in marketing margins; the OCF is seen > capex, while return ratios attractive. Valuations are cheap at 8x FY26 P/E. Analysts of IIFL Securities maintain BUY. 

Scaling up balanced portfolio: 

BPCL has grown its business through smart mix of ventures—sunrise, mature, and late-stage— which have driven continual profit growth, robust cash flows and attractive return ratios. It now plans to scale up on this successful template and is investing ~Rs1.5trn through FY24-FY28 to step up capacities of upstream (Mozambique and Brazil) and downstream units (including petchem) at Bina, RE, marketing infra, and CGDs (25 GAs). Such investments aim to enhance production of value added products and lower cyclicality in earnings, benefits of which should be visible progressively >FY26. The strong OCF (Rs250bn pa) and an under leveraged balance sheet should support the proposed capex, enhancing long term earnings visibility. 

Beneficiary of benign macro: 

Over next few quarters relative to past 2 years, analysts of IIFL Securities expect sectoral macro to remain benign, as reflected in stable oil, less volatile GRMs, and pick up in POL consumption which should benefit BPCL in FY25/26; FY24 earnings which are largely to recoup FY23 losses, may not repeat in FY25/26, and is well appreciated by investors. Meanwhile, benefits of opportunistic oil sourcing, acumen to place high margin POL products (eg: MS over HSD, upping ante in Lubricants etc.) offer tailwinds for earnings upside. A US$1/bbl change in GRM and paise 50/ltr change in marketing margin leads to 13%/12% swing in EPS. 

Cheap valuations; BUY: 

At 8x FY26 consolidated P/E stock is cheap; netting out embedded value in Mozambique E&P block (work should start soon: ~Rs44/share), PLNG, and IGL (Rs46/share), core P/E is even cheap at 7.5x FY26. The valuation multiples tend to expand a lot more in benign macro; there is also a case for dividend payout to increase (30% in base case). Analysts of IIFL Securities like all the OMCs, and prefer BPCL the most. Key risks across the sector includes sharp rise in oil prices in very short period of time.