BPCL sees significant upgrades over past quarter, why is Street turning bullish?

BPCL’s underperformance, compared to the Nifty Index's 5 percent decline, stems from a weaker rupee, LPG losses, and heightened sanctions on discounted Russian crude imports.

Despite a 16 percent decline in Bharat Petroleum Corporation Ltd (BPCL) stock over the past quarter and its exclusion from the Nifty index, brokerages have significantly upgraded their stance. According to Moneycontrol's Analysts Tracker data for February, BPCL now holds 22 buy ratings, seven hold ratings, and five sell ratings—improving from 17 buys, eight holds, and nine sells a quarter ago.

BPCL’s underperformance, compared to the Nifty Index's 5 percent decline, stems from a weaker rupee, LPG losses, and heightened sanctions on discounted Russian crude imports. However, oil marketing companies (OMCs) are expected to sustain record-high integrated margins (EBITDA per unit of refining and marketing volume), given crude prices remain below $80 per barrel.

Analysts anticipate that BPCL and other OMCs will be permitted to maintain above-historical integrated margins to finance their ambitious Rs6 trillion capex over the next five years, with 30 percent allocated to energy transition. To meet its aggressive expansion targets and double profits, BPCL would require at least Rs3,250/tonne in integrated margin.

BPCL has successfully upgraded its Mumbai and Kochi refineries and announced large-scale investments in petrochemicals, refinery expansion, and renewable energy at Bina. Historically, BPCL has traded at a premium to peers due to its superior ROE and asset management. The three major OMCs—IOCL, BPCL, and HPCL—are undergoing a multi-year capex cycle, indicating continued policy support for profitability. Additionally, BPCL could benefit from its E&P assets in Mozambique and Brazil.

Brokerage firm Nirmal Bang foresees a potential re-rating of BPCL, driven by future earnings and cash flow growth from its 26 standalone CGD projects (9MFY25 CNG sales of 96 TMT), LNG retail expansion (two retail outlets operational, 10 more planned), and 26 biogas projects. Moreover, potential global refining capacity closures could support a recovery in GRMs. BPCL has outlined a Rs100 billion CGD capex plan to expand its CNG station network from 671 to over 1,100 by FY28.

BPCL reported a GRM of $5.6/bbl, impacted by refinery shutdowns at Kochi and Mumbai, reduced discounts on Russian crude, and a lower processing rate of Russian crude at just 31%. Historically, discounted Russian crude contributed an additional $1/bbl to BPCL’s GRM, and its limited availability could weigh on margins. Meanwhile, LPG under-recovery widened to Rs 15.5/kg from Rs 10.5/kg in Q2. Additionally, the estimated cost of the AP refinery and petrochemical project at approximately Rs 950 billion equates to 0.85x of BPCL’s current market capitalization.

"We upward revise FY25E/FY26E/FY27E EPS estimates by 39%/9%/9% due to super normal GMM on auto fuel in 9MFY25 and spot > Rs4.9/lt. While we anticipate a cooling of oil prices from recent highs to support auto fuel gross marketing margins, sanctions on Russian oil may affect BPCL's access to disc. crude, which previously constituted about 35 percent at an average discount of $3/bbl, providing an additional $1/bbl boost to BPCL's GRM", said Dolat Capital in its latest note.