Broker's call: BPCL (Reduce)

CMP: ₹492.75

Target: ₹450

We maintain our cautious stance on BPCL following the recent run up in the stock. Despite the structural implications of about 13 per cent of Indian refining and about 25 per cent of Indian marketing capacity potentially being owned by a private player, we submit that the stock already prices in close to a bull case scenario for BPCL, leaving little on the table for investors. Additionally, with higher capex in prospect, BPCL also faces significant credit rating downgrades due to losing the implicit government support on balance sheet, raising credit cost. Pending clarity on valuation and actual interest from potential buyers, we downgrade to REDUCE.

While our base case target price of ₹450/share implies a 8.2 per cent downside from CMP, even factoring in more optimistic assumptions for GRMs ($6.4/bbl vs $5.9/bbl in base

case), marketing margins (₹4,800/tonne vs ₹4,700/tonne) and higher multiples (7x FY21 EBITDA vs 6.5x and 9x for marketing vs 8x) as well as 10 per cent higher E&P value gets us to a bull case value of ₹530/share, only 8 per cent upside from CMP, implying the exuberance around divestment is overdone. A blue sky scenario assuming replacement cost for refining (₹350/share EV for refining vs ₹183/share base) gets a higher value of ₹655/share but we submit that for a going concern with other alternatives in Asia it is too optimistic a way to look at valuation fort BPCL.