BPCL

Nomura downgrades BPCL’s rating to `Reduce’ from `Neutral’ with a revised price target of Rs 450, down from Rs 525. BPCL has outperformed the BSE Sensex by 15% and 38% over the past three month and twelve months respectively. The stock is building in too much hope on de-regulation/low subsidy sharing, in our view. Apart from several positive statements of intent, OMCs (oil marketing companies) have been seen as defensive. At the revised oil price assumption and subsidy sharing estimates, the earnings estimate for BPCL declines by 36% for FY10E, 38% for FY11E and 44% for FY12E. Subsidy concerns significantly increase at higher oil prices.

With lots of hope already built in, we believe risk-reward is becoming increasingly unfavourable. Nomura has decreased the EPS estimates by 36%, 38% and 44% for FY10E, FY11E and FY12E respectively, due mainly to higher subsidy at higher oil price assumptions. Nomura continues to believe that for OMCs to emerge as a longterm investment idea, concrete steps to remove ad hocism and bring transparency on subsidy sharing are a must.