Buy This Maharatna Stock For A Target Price of Rs 420: HDFC Securities

Bharat Petroleum Corporation Limited (BPCL) is an Indian government Maharatna Public Sector Undertaking company that specializes in the oil and gas sector. Its shares are now trading at a market price of Rs 356.70 on the National Stock Exchange (NSE). The brokerage firm HDFC Securities has given a buy call on the stock for a target price of INR 420.

Investment rationale

As per the brokerage "In Q4TD, gasoline cracks have improved to USD 11.9/bbl (at six-year high) and gasoil cracks have improved to USD 12.3/bbl (two-year high), led by improvement in global petroleum product demand, after COVID recovery, resulting in an improvement in gross refining margins (GRMs) for oil marketing companies (OMCs). For BPCL, we believe that the stabilisation of the PDPP unit at Kochi by H2FY23 should contribute ~USD 1/bbl improvement in refining GRMs. We expect overall BPCL GRMs to improve to USD 5.4/5.9/7 per bbl over FY22/23/24E vs USD 1.9/bbl in FY21. Every USD 1/bbl improvement in GRM increases BPCL's FY23/24 EPS by 24/19% or INR 8.5/8.7 per share."

HDFC Securities has said "In Q4TD, the estimated average auto fuel margins declined to INR -1.5/ltr, from INR 3.5/ltr in FY21. With the assembly elections now over, we expect OMCs to resume daily revision of retail auto fuel prices, albeit gradually. Given the increase in oil prices, our calculation suggests that OMCs need to take ~INR 11/ltr price hike to factor in the rise."

"Additionally, the government has announced an LPG subsidy of only INR 40bn in the recent budget, which we believe should be revised upwards. Or retail price should be raised, given the increase in crude oil price, so as to lighten the LPG under-recovery burden on OMCs. Therefore, for BPCL, we factor in blended gross marketing margins of INR 4.7/3.8/4 per litre for FY22/23/24E, down from INR 5.2/litre in FY21," the brokerage says.

Buy for a price target of INR 420

HDFC Securities has claimed "We upgrade Bharat Petroleum Corporation (BPCL) to BUY, with a target price of INR 420, given it has corrected ~30% from its peak over the last six months, owing to pressure on auto-fuel marketing margins and an increase in LPG under-recoveries. We believe the recent correction is overdone, and see limited downside from current levels, led by: (1) improvements in refining margins, (2) resumption of daily auto-fuel price changes, and (3) a gradual reduction in LPG under-recoveries."

"Our SOTP valuation factors in BPCL's refining segment at 5x EV/E, marketing and pipeline segments at 6x EV/E and investments at 25% discount to CMP. At CMP, BPCL is trading at 10.1x FY23E EPS and 8.3x FY23E EV/EBITDA (vs. the five-year average of 10.8x PER and 7.9x EV/E)," further added the brokerage.

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.