For Q4’09, Bharat Petroleum Corporation Limited (BPCL) reported a pleasant turnaround in its bottomline.
Despite a dip in net sales, the adjusted net profit surged to Rs36 billion from Rs0.5 billion in Q4’08.
This turnaround is largely attributable to lower crude oil prices (USD 40-45 per barrel), which allowed Oil Marketing Companies (OMCs) such as BPCL to generate healthy profits from retail fuel sales.
In addition, the company’s under-recoveries incurred during the year were fully compensated by oil bonds of Rs162.2 billion and upstream discounts of Rs75 billion.
On July 1, 2009, the GoI announced a price hike of Rs4 per litre and Rs2 per litre for petrol and diesel, respectively, in an attempt to decrease the impact of the losses suffered by OMCs as a result of the sharp recovery in crude oil prices (to ~$70 per barrel).
Although the price hikes attempted by the GoI will not fully cover the losses of fuel retailers, who were losing around Rs6 per litre on petrol and Rs3.6 per litre on diesel, it will substantially reduce the under-recovery burden of OMCs to manageable levels.
The mounting under-recoveries on the sale of domestic LPG and PDS kerosene continue to remain a cause for concern for the OMCs.
At the current level of crude oil prices (~USD 70 per barrel) the under-recoveries on LPG and PDS kerosene stands around Rs93 per cylinder and Rs15.3 per litre, respectively.
BPCL stands to lose heavily because of the increasing under-recoveries on domestic LPG, as it is one of the largest LPG providers in India.
With crude oil prices hovering at around $70 per barrel levels, we expect the under-recoveries for PDS kerosene and domestic LPG to escalate further. However, the recent price hike in petrol and diesel prices should provide some respite to the Company.
At its current market price (CMP) of Rs. 453.7, the stock trades at a forward P/E of 8.6x and 8.3x for FY10E and FY11E, respectively.
We have revised our estimates to consider the recent developments in the sector. Based on our valuation, we have arrived at a target fair value of Rs526, which provides an upside potential of 15.9% from the CMP.
Thus, we upgrade our rating for the stock to BUY.