Bharat Petroleum Corporation Ltd.

Bharat Petroleum Corporation Limited (BPCL) is an Indian state-controlled oil and gas company headquartered in Mumbai, Maharashtra. It has business interests primarily in refining and marketing of crude oil. The refining and marketing segment contributes ~99% of the total revenue. Its products include LPG, diesel, petrol, bharat metal cutting gas, kerosene, aviation fuel, bitumen, naphtha, auto lubes, lubricants, grease and oil. Its secondary segment constitutes Exploration and Production (E&P) activities. As of June 2015, the company has participating interests in 17 exploration blocks; in consortium with other companies.

Valuation and view

BPCL is one of the three key beneficiaries of the retail pricing deregulation implemented by the government as it leads to lower interest cost, relief from subsidy sharing burden and higher auto fuel marketing margins. Besides it is also expected to gain from ramp-up in its business verticals. It is planning to expand its refining capacity by 60% to 48 MT giving it economic moat in terms of improved market position. Moreover, in order to reduce its exposure in under recoveries it is focusing on its E&P vertical. Notably, discoveries in the hydrocarbon reserves in Brazil and gas reserves in Mozambique (recoverable reserves estimated at ~70 tcf) provide high revenue visibility in this segment. We expect BPCL’s net profit to grow at a CAGR of ~38% during FY15-FY17E and the RoE and RoCE to improve to 26.2% and 26.7% respectively.

At the current market price (CMP) of Rs. 883, the stock trades at an EV/EBITDA multiple of 5.4x FY16E and 4.8x FY17E. We recommend ‘BUY’ with a target price of Rs. 1,065, assigning a forward EV/EBITDA multiple of 4.0x, which implies a potential upside of ~21% to the CMP from 12 months perspective.

Research Report Bharat Petroleum Corporation Ltd

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