Stocks of public sector oil marketing companies — Bharat Petroleum (BPCL), Hind-ustan Petroleum (HPCL) and Indian Oil (IOC) — have gained much more than the broader markets after hitting 12-month lows in the first week of January 2012. While trough valuations were partly responsible for the gains, expectations that the government would reimburse the remaining underrecoveries in a few weeks also helped.
Going ahead, too, analysts expect some developments that should boost their stocks. However, among the oil marketing companies (OMCs), they are savvier on BPCL. They believe the expected reimbursement of subsidy by the government — a lower share of burden for OMCs —— and a likely increase in fuel prices are good news for the sector, while BPCL stands out due to its strong exploration and production (E&P) resources petrochemicals foray.
Further, Niraj Mansingka of Edelweiss Securities, in his report, observes that he prefers BPCL to HPCL. Though HPCL has a higher leverage to correction in crude oil prices, its low return capex (Euro IV) is yet to be completed. Overall, nearly 86 per cent of the analysts have a buy rating on the stock, according to Bloomberg data.
| STRONG PROFIT GROWTH IN FY13 | |||
| In Rs crore | FY2011 | FY2012E | FY2013E |
| Net sales | 153,645 | 191,469 | 188,305 |
| % change y-o-y | 24.1 | 24.6 | -1.7 |
| Ebitda | 4,261 | 4,687 | 5,364 |
| Ebitda (%) | 2.8 | 2.4 | 2.8 |
| Net profit | 1,635 | 1,364 | 1,843 |
| % change y-o-y | 0.2 | -16.6 | 35.1 |
| EPS (Rs) | 45.2 | 37.7 | 51.1 |
| PE (x) | 11.4 | 13.4 | 9.9 |
| E: Estimates Source: CapitaLine, Bloomberg, Analyst reports | |||
Underrecoveries rising, analysts differ
As the rupee continues to remain weak vis-a-vis the dollar and crude oil prices remain firm, the underrecoveries (the difference between selling price and cost price of fuels) are on a rise. Most analysts now peg the total underrecoveries to touch Rs 1,40,000 crore.
However, a majority of analysts feel the share of subsidy burden will be higher on the upstream (oil producing) companies. Compared to 39 per cent last year, it may go up to 40-54 per cent. While OMCs are expected to be in a better position, analysts differ on their share.
Analysts at Enam observe in their report that OMCs may bear at least Rs 4,000 crore of underrecoveries and it is the upstream companies that will have to share 54 per cent of the burden (Rs 76,000 crore), as the government may not share more than Rs 60,000 crore in view of a higher fiscal deficit.
On the other hand, CRISIL, in a recent report, pegging underrecoveries for 2011-12 at Rs 1,40,000 crore, said the government would pool in 50 per cent, upstream companies 40 per cent and downstream (OMC’s) 10 per cent. This works out to Rs 14,000 crore.
But, irrespective of their share, OMCs are most likely to end the current financial year with a profit. They reported a combined loss of Rs 23,440 crore in the first half of 2011-12, compared to a net profit of Rs 2,531 crore in the same period a year ago. BPCL, which reported a loss of Rs 5,791 crore in the first half of 2011-12 (the lowest among OMCs), had reported a profit of Rs 424 crore in the period the previous year.
Asian Market Securities’ Arindam Pal adds that downstream companies will not be allowed to go in the red (they have reported profits for 15 years, even during tough periods) as that will have an adverse impact on crude oil imports. So, they are likely to bear underrecoveries only to the extent they they don’t slip in the red.
The other good news is that the reimbursement of pending compensation for the first half is expected in a few weeks. In spite of the government committing to reimburse Rs 30,000 crore of underrecoveries for the first half, it had released only Rs 8,000 crore till December 2011. This delay has considerably pushed the debt levels (25-39 per cent since the end of 2010-11 according to analysts at Antique) of OMCs in order to fund their working capital requirements. Hence, the move will help OMCs reduce their year-to-date losses and debt.
Advantage E&P
BPCL has a large E&P portfolio that gives it an edge. The resource potential of oil and gas is substantial even in the recently announced discoveries. Analysts at Kotak Securities, in their report, say the Anadarko-led consortiums, recent estimates suggest 15-30 trillion cubic feet of recoverable gas in Mozambique. BPCL holds a 10 per cent stake in this venture. Also, Brazil’s assets are likely to have 300 million barrels of oil, where BPCL has 12.5 per cent stake. All these add to BPCL’s long-term prospects.
Meanwhile, analysts at Motilal Oswal Securities have estimated benchmark Singapore GRMs (gross refining margins) at $7.8 per barrel for December quarter against $5.5 in the year ago period and $9.1 in September 2011 quarter-- indicating strong topline growth for BPCL.
However, most analysts have not accounted for subsidy share from government and hence, expect a loss at net level. Going ahead, they expect GRMs to range $7-9 a barrel, and against a loss of Rs 6,800 crore during April-December 2011, analysts expect BPCL to end FY12 with a net profit of Rs 1,286 crore after accounting for subsidy.
For now, analysts at Antique Broking have arrived at a price target of Rs 607 on the basis of sum-of-the-part valuation (value of core business at Rs 478, plus average EPS for 2011-12 and 2012-13 and listed investments at Rs 83 per share).
The consensus one-year target price for the stock, according to Bloomberg data, also stands at Rs 649, showing an upside of 28.5 per cent from the current price of Rs 505.
