After 42% rally in 2 months, here's why analysts are now cautious on BPCL

Shares of Bharat Petroleum Corporation (BPCL) have surged around an impressive 38 per cent since September 3, mainly on the news of privatisation. In the past two months, the stock has jumped around 42 per cent.

As per reports, the government is considering a proposal to sell India's second-largest state refiner and fuel retailer BPCL to foreign and private firms. And, while a number of analysts have given a thumbs up to the privatisation plan and have upgraded the stock to buy, there are others who have turned cautious on the company. 

For instance, analysts at Centrum Broking note the rally in the stock has been overdone and there is not much left on the table for investors now. "BPCL also faces significant credit rating downgrades due to losing the implicit Government support on Balance sheet, raising credit cost. Pending clarity on valuation and actual interest from potential buyers, we downgrade to REDUCE," they wrote in a note dated October 7.

Last week, international credit rating agency Moody's warned of downgrading Bharat Petroleum Corporation (BPCL) to Ba1, if the government goes ahead with privatisation by selling its stake to private entity, which would remove the company's links and prompt bond redemption, a credit negative. 

On September 30, the group of secretaries on disinvestment gave its approval for to sell government's entire 53.29 per cent stake in BPCL, which is likely to be completed by March 31, 2020. READ MORE

NOT MUCH TO CHEER FOR INVESTORS

Probal Sen, an oil & gas analyst at Centrum Broking wrote in a co-authored report with Akshay Mane that the the stock has already factored in most positives and there are limited triggers from here on. Their base case target price is Rs 450/share - an 8.2 per cent downside from the current market price (CMP). 

"Even factoring in more optimistic assumptions for gross refining margins (GRMs) at $6.4/bbl vs US$5.9/bbl in the base case, marketing margins (Rs 4,800/t vs Rs 4,700/t) and higher multiples (7x FY21 EBITDA vs 6.5x and 9x for marketing vs 8x) as well as 10 per cent higher E&P (exploration and production) value gets us to a bull case value of Rs 530/share, only 8 per cent upside from the current price, implying the exuberance around divestment is overdone," they said. 

Even in the best-case scenario, assuming replacement cost for refining (Rs 350/sh EV for refining vs Rs 183/sh base) gets a higher value of Rs 655/share, but given a going concern with other alternatives in Asia it is too optimistic a way to look at valuation fort BPCL, they said.

Global brokerage CLSA also shares similar views. The brokerage has maintained 'SELL' rating on the stock with the target price of Rs 300, down 39 per cent from its last traded price (as of Monday's close). Hopes of open offer after privatisation has driven up the stock price but there is not much steam left on the table, analysts at CLSA wrote in a recent report.

Tepid fuel consumption growth, higher capex and the underperformance of Kochi refinery, despite the expansion in place for more than one year, are some of the other key concerns analysts seem worried about. "Given that valuations have run ahead of fundamentals, investors should book profit. Downgrade the stock to REDUCE," said analysts at Centrum Broking.