Stock Reivew: BHARAT PETROLEUM

   Bharat Petroleum's stock market performance of the last few weeks reflects its importance as a defensive stock, particularly, in the face of global economic challenges. The company is set to benefit from weakening global crude oil prices, while the government gradually takes steps to tackle the petroleum industry's under-recovery problems. The recent commissioning of its Bina refinery and a portfolio of exploration blocks hold key to BPCL's future success. Long-term investors should consider buying into the scrip.

BUSINESS

Bharat Petroleum (BPCL) is India's second-largest petroleum retailer with annual sales of around 30 million tonne of fuels. It ended FY11 with a combined refining capacity of over 24 million tonne at its three refineries in Mumbai, Kochi and Numaligarh. The company's profitability has stagnated over the last one decade due to government restrictions on retail sale prices of petrol, diesel, LPG and kerosene.

INVESTMENT ARGUMENT

At a time when the world is rife with fears of a double-dip recession, BPCL will be an excellent defensive bet as it stands to gain from falling oil prices. If fears of an economic recession come true, global oil prices are bound to fall from the current level due to lower demand. Even without a recession, an end to the Libyan crisis should bring down oil prices on hopes of an improvement in supplies.
Back home the government has been taking positive steps, albeit very slowly, towards addressing the under-recovery problem of the petroleum sector. Last year the government decontrolled natural gas prices followed by petrol prices. In the first quarter of FY12, the government slashed indirect taxes, before raising diesel, LPG and kerosene prices marginally. Still the industry is looking at under-recoveries of around 80,000 crore for FY12, which have to be curtailed if the government has to meet its budget deficit target.

The government is also mulling follow-on public offers (FPOs) of key petroleum sector companies ONGC and Indian Oil to meet its divestment targets for FY12. This will require further clarity on the subsidy mechanism, which will be a positive for the entire sector.

BPCL has recently commissioned its fourth refinery at Bina in Madhya Pradesh in partnership with the Oman Oil Company. The refinery has a capacity of 6 million tonne. Out of the 4,700 crore of equity, around 3,100 crore has been subscribed to by the two partners, while the rest is yet to be arranged. The company management is keen on an IPO to fund the gap. This new refinery is expected to improve the company's overall margins thanks to its better configuration, besides higher volumes. An IPO in future will be a further positive for BPCL. BPCL holds stakes in 27 exploration blocks — 9 in India and 18 abroad — through its subsidiary Bharat PetroResources. Seven discoveries have been made in these blocks for which development is under way.

The company has entered other areas of the petroleum value chain through a series of joint ventures. It holds stakes in LNG importer Petronet LNG apart from city gas distribution companies such as Indraprastha Gas and Sabarmathi Gas. Its other JVs span businesses including operating fuel pipelines, renewable energy to bunkering for marine vessels and aeroplane refuelling at airports.

VALUATION & CONCERNS

BPCL has already outperformed its peers and is trading at a price-tobook value (P/BV) of 1.8, substantially above Indian Oil's 1.4 and HPCL's 1. BPCL's dividend yield at 2% is the lowest among the three companies.

Any runaway spurt in global oil prices should be a trigger to dump BPCL shares, as the government's reaction to mitigate impact of rising oil prices has always been delayed.