While Bharat Petroleum Corporation Limited (BPCL)’s profit-generating ability has been boosted by the softening crude oil prices, it is fighting severe headwinds.
Fuel price cuts, rupee depreciation, huge under-recoveries on PDS kerosene and domestic LPG, and lower refining margins continue to pressurize the margins.
In addition, OPEC’s stride towards stemming the falling crude oil prices by cutting production is adding to the Company’s worries on the supply side.
While petrol and diesel are still giving positive returns at the current crude oil price levels, the Oil marketing Companies (OMCs) continue to bear huge under-recoveries on PDS kerosene and domestic LPG, which stood around Rs16.6 per litre and Rs142.6 per cylinder, respectively, before the fuel price cut announced in January 2009.
BPCL stands to lose heavily because of the increasing under-recoveries on domestic LPG, as it is the largest LPG provider in India (catering to around 21 million domestic customers and thousands of industrial users) and the fact that the GoI has further reduced domestic LPG prices by Rs25 per cylinder.
GRMs under pressure
During the quarter ended December 2008, gross refining margins (GRMs) plummeted as the sharp fall in petroleum-product prices outpaced the correction in crude oil prices.
We expect GRMs to remain under pressure because of the falling petroleum product prices, resulting from weakening demand among industrial users and the ongoing slowdown in the auto industry.
BPCL’s stock has achieved its earlier given target price of Rs370. At its current market price of Rs. 396.8, the stock trades at a forward P/E of 6.2x for FY10E.
We have revised our estimates to consider the current market scenario. Based on our valuation, we have arrived at a fair price value Rs388, which does not provide any significant upside potential. Thus, we have downgraded our rating on the stock to HOLD.