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 governments stake.
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.
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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.
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