After losing 20% this year, can Bharat Petroleum shares see a rebound?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Despite reporting stellar fourth quarter earnings, shares in Bharat Petroleum Corporation Ltd (BPCL) have lost nearly 20 percent of its value this year as worries around rising crude oil prices continued to weigh on the minds of investors.

The recent spike in crude prices has stoked fears that the central government will force oil marketing companies (OMCs) to bear the subsidy burden.

Oil subsidy has long been a matter of concern for the OMCs. On the one hand, the OMCs have to bear a part of the under recovery and on the other, there is a time lag of six to eight months before they receive the compensation from the government. This results in liquidity crunch for the OMCs, leading to additional borrowing and interest burden.

Similarly, profits of the the upstream oil companies are affected since they share the under-recovery burden in the form of a ‘discount’ on crude oil prices.

Another major worry for BPCL investors is the company’s slower-than-expected rise in refining margins at its Kochi facility, suggesting that the expansion is yet to commence.

While OMCs usually benefit from an increase in petrol or diesel prices, the government is unlikely to offer any steep hike in retail prices because the 2019 general elections is fast approaching.

So the question remains: Can BPCL rebound from its current levels?

There are certain triggers that suggest so, one being government’s clarification that the daily fuel pricing mechanism will continue and the same will not be regulated. Another factor being that the OMCs will not be asked to share the subsidy burden.

Moreover, analysts expect refining margins at the Kochi facility to add around $2 per barrel to the current gross refining margins.

Brokerages, however, are not on the same page when it comes to BPCL. Investment bank CLSA recently increased the target price, but still maintains a ‘sell’ rating as they see a macro risk in election year.

Financial services company Jefferies also maintains underperform rating and has cut its  take-profit order (TP) from 425 to 360.

Morgan Stanley, on the other hand, is sanguine about the company and maintains overweight as they expect robust fuel marketing margins and steady earnings. Edelweiss also remains constructive on the stock as they expect new Kochi capacity to fetch premium GRMs.

While macro risks largely remain same for all the OMCs, there is valuation comfort in BPCL and it trades comparatively cheaper to its peers.

For other Hunting for Value stories, click here.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow