BPCL Share price: Upgrade to OUTPERFORM from Neutral rating, hikes target price to Rs 585 from Rs 375

BPCL Share price: In Credit Suisse view, steady-state EBITDA for BPCL could be US $2 bn - 2.5 bn (FY20: US $1.7 bn). The higher end of range is possible when the potential acquirer is able to reduce refining costs, increase productivity of marketing outlets, and increase non-fuel revenues. Therefore the stock has upside even beyond divestment of the government’s stake. BPCL share price closed yesterday at Rs 454, down Rs 6.7 or 1.45%.

BPCL share price should rerate as it gains market share from IOC and HPCL and non-fuel revenues typically command higher multiple. The macro is also improving for the refining sector, with inventories now down for both gasoline and diesel, and cracks have started improving.

See Zee Business Live TV Streaming Below:

In Credit Suisse view, refining cost reduction can boost EBITDA by US $150 mn, higher non-fuel EBITDA at marketing outlets can add US$100 mn+, and higher footfalls can add US $200 mn+. BPCL started with project Nishchay in FY16 to promote non-fuel revenues, but gave up on most initiatives in two to three years. Even the current app “SmartDrive” for customers does not have real-time data at outlets, and thus active users are few. We show that globally retail outlets have a substantial contribution from non-fuel revenues. 7-Eleven acquired Speedway outlets in the US for US $21 bn (14x CY20 EV/EBITDA) where half of the gross profit was driven by merchandise sales.

The government’s stake is worth US $6.9 bn. Post BPCLs open offer, the maximum outflow would be US $10.3 bn. The buyer can halve the capex at BPCL and sell non-core assets (US $4bn). Among bidders, Apollo Global has done a deal of this size and Vedanta has partnered with Centricus.

The target price of Rs 585 on BPCL values refining at 6x EV/EBITDA, marketing at 8.5x FY23 and non-fuel at 15x. Credit Suisse change FY21-23E EPS by +4%/-22%/-12% as they lower margins, dividend out proceeds from stake sale in Numaligarh Refinery.

BPCL Key risks:

Delay in stake sale and slow recovery in margins.