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The stock of public sector oil-marketing company BPCL has been on a roll, gaining more than 60 per cent over the past year.
Factors contributing to the run-up include the rout of crude oil which allowed the government to decontrol diesel prices. This slashed the under-recoveries incurred by the oil marketing companies that had to wait long to be compensated by the government.
Consequently, the companies’ cash flows improved, borrowings dipped and interest costs fell. Next, a robust refining environment in the March quarter translated into strong gross refining margins — the difference between the cost of crude oil and the price of the refiners’ products. The result was a 23 per cent jump in BPCL’s 2014-15 profit.
Despite the run-up, investors with a long-term perspective can still buy the BPCL stock. For starters, valuation remains reasonable. At ₹966, the stock discounts its trailing 12-month earnings by 14.5 times, lower than the average 17.5 times it has traded at in the past three years.
Also, the company’s prospects look bright. With oil from Iran expected to enter a market already awash in crude, prices are expected remain under pressure. So, under-recoveries should decline further. This, combined with continued good refining margins, should aid profit growth.
Besides, with diesel pricing being freed, there is the possibility of BPCL earning higher margins on marketing the fuel. Private players such as Reliance Industries and Essar Oil opening their retail fuel outlets may not pose much of a threat to the public sector oil-marketing companies; the latter have expanded aggressively over the past few years and are likely to continue dominating the market.
Besides, the expansion initiatives by BPCL at its Kochi and Bina refineries should add to its volumes in the coming years. It will also give the company a foothold in the petrochemicals business.
BPCL’s significant presence in the exploration business through stakes in giant gas fields in Brazil and Mozambique gives it an edge over peers Indian Oil and HPCL.
While gas prices too have corrected over the past year like oil prices, BPCL’s assets will take a few more years to start production. Also, the company is reported to have acquired these assets quite cheap; this gives it the buffer to absorb declines in asset value, if any.
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