BPCL’s results for Q109 were adversely affected by the increase in crude oil prices, which could not be fully passed on to the consumers. The company posted a net loss of Rs10.3 billion, primarily due to the surge in crude oil prices and the price cap on petroleum products.
We believe that supply-side constraints on crude oil will persist and prices will remain firm, although they have eased off from the higher levels.
At the current levels, even after accounting for the recent hike in prices, duty cuts, and the subsidy-sharing arrangement with the upstream companies, OMCs are likely to incur an aggregate loss of Rs200 billion.
Even in the scenario of reduced oil prices, it will be difficult for the OMCs to return to profitability unless the regulated prices of petroleum products are hiked again.
The recent price hike in petroleum products and its consequent effect on inflation has been a major concern for policy makers in the past few weeks. In such a scenario, a second round of price hike will be challenging.
Moreover, with the general elections barely 9 months away, another hike looks extremely unlikely. We are of the view that OMCs will at most earn marginal profit in FY09.
At current price, the stock trades at P/E of around 8.3x for FY10E, respectively. Most of the negative news is already discounted in the price, and we don’t expect any major negative surprises. We reiterate our HOLD rating.