BPCL: Still a gusher

The stock of public sector oil marketing company BPCL, on a roll until recently, has declined about 11 per cent over the past month or so.

Subdued September quarter results, along with the recent market weakness due to the demonetisation exercise and Donald Trump’s victory in the US Presidential elections, took a toll.

This fall though presents a good buying opportunity for long-term investors. At ₹610, the stock trades at about 11 times its standalone trailing 12-month earnings, higher than its average valuation of about nine times over the past three years, but lower than its peak of 12.5 times.

BPCL remains on a strong footing, thanks to favourable pricing dynamics and expansion initiatives which should start paying off in the next few quarters. In the near term, improvement in refining margins is a positive. The company’s exposure to upstream assets should also help in the long run.

Over the past two to three years, the pricing reforms in the oil sector — deregulation of diesel and direct benefit transfer of LPG subsidy — aided the public sector oil marketing companies by slashing under-recoveries and subsidy burden, and cutting down debt and interest cost.

This along with favourable refining market conditions, aided by the rout of crude oil, helped these companies improve their performance sharply.

Following a 23 per cent rise in 2014-15, BPCL’s consolidated profit rose 66 per cent in 2015-16. The performance in the first half of 2016-17 has been fine too with standalone profit increasing about 16 per cent.

The stock has kept pace, more than doubling since June 2014. In the recent September quarter, the company’s gross refining margin (GRM) — the difference between the price of its product slate and the cost of crude oil — fell to $3.08 a barrel from $3.87 in the year-ago period. This was mainly due to inventory adjustments and costs pertaining to the expansion of the Kochi terminal. Despite this, profit in the September quarter rose about 26 per cent year-on-year, aided by a spike in other income. The core performance should get better in the coming quarters.

Benchmark GRMs have been on the rise and risk of inventory loss seems low due to rise in oil prices. Importantly, expansion of the Kochi plant, (from 9.5 mtpa to 15.5 mtpa), that should be commissioned by the next quarter, should improve volumes and margins.

The proposed expansion of the Bina refinery, which has turned profitable, will also help. The planned listing of the Bina refinery in the next fiscal should unlock value for BPCL.

Demand for petro-products in the country has been healthy — BPCL’s sales volume rose about 7 per cent Y-o-Y in the recent six months. It is expected to continue growing at a steady pace. Threat of increasing competition in fuel retailing by private players will taketime to play out, given the significant investments needed in infrastructure.

Also, proactive measures being adopted by the public sector oil companies, that control about 95 per cent of the outlets across the country, should help them retain dominance.

BPCL’s investments in high-potential gas fields in Brazil and Mozambique should help in the long run when energy prices revive. The company has also been making use of the weakness in hydrocarbon assets in recent times to expand its upstream presence; it recently picked up stakes in two producing Russian oilfields in a consortium with Indian Oil and Oil India.

With consolidated debt-to-equity just about 1 time as of March 2016, BPCL has the financial muscle to fund its expansion plans.

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