Accumulate BPCL; target of Rs 397: Emkay

Emkay Global Financial Services is bullish on Bharat Petroleum Corporation (BPCL) and has recommended accumulate rating on the stock with a target of Rs 397 in its November research report.

Investment Rationale: BPCL has been one of the best performing (absolute performance) stocks this year +32% from January 2012 on account of E&P successes and price hike/reforms in diesel/cooking fuels. Recently stock has corrected from its high of Rs.394 to currently at Rs.315, mainly on the back of higher under recovery, depreciation of rupee and weakening in GRM. It has outperformed HPCL 24% and IOC 30% YTD due to E&P business valuations However at current level, we see that market/street has ignored the E&P valuation and factored the worst case valuation (our worst Case Rs.303). We value BPCL on an SOTP basis at Rs.397/sh. E&P assets at Rs 100/sh which accounts for 25% of the value and other investments contribute 21.6% or Rs 86/sh. BPCL’s core refining and marketing business is valued at ~Rs 211/sh on 1x FY14E BV. At CMP stock trades at 1.2x FY14 P/BV, providing attractive level to enter in the stock with favorable risk reward. Hence we change our recommendation from Accumulate to BUY with TP of Rs.397.

Key Concern:

Lower than estimated LNG price - The current consumption levels of 240mmtpa as against existing export capacities total 280mmtpa. While 84.2mmtpa of additional LNG export capacities are under-construction and likely to be commissioned by 2017. A further 143.6mmtpa of liquefaction capacity is in planning phase which is likely to be come online by 2023. While there are various supply sources emerging, viz. East Africa, Australia and US, the demand for LNG would come primarily from Asia. Given the abundance of reserves and capacity addition going ahead, LNG prices would come under pressure. However we have already factored conservative LNG prices at $12.5/mmbtu for our estimates, considering Mozambique project is competitive compared to other projects.

Delayed ramp up in LNG capacity, our NPV would affect by Rs.15/share – Currently in both Mozambique and Brazil company is under drilling process (i.e Exploration and appraisal). We note that monetization of the find/assets is still a few years away (first LNG train expected only by 2019). Staggered start up of all 6 LNG trains over FY20 to FY25 with a gap of one year, results in NPV decline of Rs.15/share.

FIIs holding more than 30% in Indian cos

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