BPCL: Refined show

The sharp market fall over the past few months has taken a toll on some promising stocks too. Public sector oil marketing company BPCL, for instance, is down about 18 per cent since the beginning of December. This presents a good buying opportunity for investors with a long-term perspective.

One, the valuation is attractive. At ₹766, the BPCL stock now trades at about seven times its standalone trailing 12-month earnings, lower than the three-year average of over eight times. The dividend yield is also high at close to 3 per cent. Also, the company should continue doing well. In 2014-15, its profit grew 23 per cent, while in the nine months ended December 2015, it more than doubled year-on-year to ₹4,883 crore.

The factors that have driven the company’s strong performance over the past two years — healthy gross refining margin (GRM) and low under-recoveries — still hold.

In the nine months ending December 2015, BPCL’s GRM (the difference between the price of their product slates and the cost of crude oil) increased to $6.69 a barrel from $2.08 a barrel in the year-ago period. Better operating metrics than peers Indian Oil and HPCL have helped BPCL post higher GRM. Also, its ability to contain inventory losses on crude oil dips has been better.

The refining margin should remain healthy, given the robust demand for end-products such as petrol, diesel and LPG, and no big refinery capacity expansions globally.

Also, with low crude oil prices, the company’s subsidy burden should stay subdued. Aided by diesel decontrol and the direct benefit transfer of LPG subsidy, the under-recoveries borne by BPCL from selling fuels below cost fell to ₹46 crore in the nine months ending December 2015 from ₹494 crore in the year-ago period. This too is expected to be fully compensated as per the subsidy-sharing formula announced by the government.

Lower subsidies meant improved cash flows and lower working capital borrowings — this helped BPCL slash its interest cost by half in 2014-15 and by 28 per cent year-on-year in the nine months to December 2015. With subsidy reined in, BPCL’s interest cost should also stay under control.

Also, lesser fuel losses in refining thanks to low crude oil prices, and the possibility of higher marketing margins due to diesel decontrol should help. So will the commencement of the BCPL gas cracker project in which Numaligarh Refinery, a BPCL subsidiary, has 10 per cent stake.

In the coming two to three years, the expansion at its Kochi and Bina refineries should add to BPCL’s volumes, and give it a foothold in the petrochemicals business.

Also, its stakes in high-potential gas fields in Brazil and Mozambique should stand BPCL in good stead in the long run. The company acquired these assets quite cheap and has the buffer to withstand declines in the asset value, due to the drop in gas prices. Production is still some years away; gas prices should make a comeback by then.

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