BPCL is India's second largest oil marketing company (OMC) and the third largest by sales with a turnover of Rs 2,42,181 crore (FY13). The company has a refining capacity of 12 MMTPA at its Mumbai facility and 9.5 MMTPA at Kochi. The company has a strong presence across the country with its network of 114 depots, 9,289 retail outlets and 2,452 LPG distributors. Through its subsidiary Bharat Petro Resources, the company focuses on E&P of hydro carbon blocks and has 22.5 per cent stake in Indraprastha Gas and 12.5 per cent in Petronet LNG.
Strengths
BPCL has ventured upstream into E&P. The company has 17 discoveries with eight in Mozambique, six in Brazil and the remaining in India, Indonesia and Australia. BPCL's and Videocon Industries' 40 per cent joint interest recently made a discovery in Brazil. Early estimates peg the block to hold more than one billion barrels of oil. BPCL even entered the more recent shale gas mania in Perth, Australia.
The ramp-up of the Rs 11,400 crore Bina refinery in which BPCL has a 49 per cent stake is expected in the next couple of quarters. This expansion will give Bina refinery a capacity of 6 mmtpa. Bina being a new higher complexity refinery has a gross refining margin (GRM) of $11 per barrel which is significantly higher than BPCL's own GRM of $4.7 per barrel.
Concerns
The biggest concern for all OMCs is political. OMCs and the entire oil and gas sector need reforms. But this is a sensitive area that has political ramifications that every party in power wants to avoid. The Kirit Parikh committee recommendation, for instance, is still under review by the Oil Ministry. A lot hinges on the reforms and how much of the recommendations are adopted.
BPCL incurred gross under-recoveries of Rs 8,800 crore in the second quarter of the current financial. It received Rs 4,190 crore from upstream companies and Rs 4,400 crore from the government, leading to a net under-recovery of Rs 210 crore. As per the Kirit Parikh report, the government and upstream companies are to equally share the total under-recoveries. If this does indeed take place, BPCL would not have to share any under-recovery in the coming years.
Whichever political alliance comes to power after the general elections in 2014, diesel price reforms will remain an integral part of managing the twin deficits. After the deregulation of petrol prices, diesel is the biggest source of under-recoveries. Of the total under-recoveries of Rs 60,907 crore in the first half of FY14, the share of diesel alone was Rs 28,266 crore. Any pricing reform will have a direct impact on the fortunes of BPCL.
The company has a debt of Rs 23,567 crore in its books (FY13), which translates to a debt to equity ratio of 2x. But BPCL has recently managed to prune its debt to Rs 16,894 crore as of September 2013. Around 90 per cent of the company's long term debt is foreign currency denominated. Despite these bleak figures, the company is afloat because of the government patronage. If it was a non-government concern, pruning the debt would be a priority. According to Motilal Oswal estimates, increasing the diesel price by Rs 0.45 per litre every month is expected to reduce gross under-recoveries by as much as 40 per cent by FY15.
Valuations
BPCL trades at 3.4 times its earnings. If there is any single reason to invest in BPCL, it is the company's E&P activities in Mozambique and Brazil. Since these are early days for reserves to be accurately determined, the market may not be valuing them to their actual potential. Beyond the E&P valuation game, there is no fundamental reason yet to put your money in BPCL till the time that the company is allowed to function without political interference: an unlikely possibility.
This article was originally published on February 17, 2014.
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