Refining remains weak, but worries ease on marketing; we remain optimistic on divestment prospects in FY22F. Compared to infrequent/delayed retail petrol/diesel price changes in 2020, oil marketing companies (OMCs) have taken daily price increases recently. Despite peak prices, inflation concerns, threat of strikes by transporters, and negative press, price hikes were sustained. So far in 2021, petrol/diesel prices are up ~₹7.2/7.5/L (9-10%, ~$16/bbl) and LPG prices are up ₹100/cylinder (+14%).
On our estimates, retail prices are now factoring in international product price of $64-65/bbl. We see downside risk to oil prices (we assume $55/bbl for FY22F), and product margins remain weak. Upcoming state elections are a risk. But we note there is scope of excise duty cuts. In our view, risk/ reward is a lot more favourable now for marketing. However, refineries are still going through one of the most severe down-cycles, with recovery delayed due to a second wave of the pandemic, and near-term outlook is weak.
Divestment, delays and lukewarm interest, still looks likely to complete in FY22F; BPCL’s divestment, initially planned for FY20, has been delayed. Investor interest has also been lukewarm. We believe the current environment is not the best one to fetch good valuations. Still, the government appears to be keen, and we expect divestment in FY22F.
Valuations, more positive on marketing; raise TP to ₹550 (from 505); buy driven by inventory gains, we raise FY21F consolidated EBITDA by 16%, and FY22F/FY23F by 4% / 10%, as higher marketing margins offset our cut in refining margins. Higher EBITDA, other income and lower interest cost, translate to FY21F / 22F /23F consolidated earnings increases by 31%/19%/24%. We roll forward valuations to Sep-22F (from Mar-22F). We continue to value refining at 5x EV/EBITDA. With a more positive outlook, we now value marketing at 7x EV/EBITDA (6x earlier). We adjust Bina refinery stake to 100% from FY22F, and now assume BPCL would get ₹50bn (₹25/share) for Numaligarh refinery stake sale (earlier ₹75bn). Our revised SoTP value is ₹435/sh (earlier ₹290). Our privatisation option value at an assumed deal price of ₹600/share (unchanged) for open offer declines to ₹115/sh (earlier ₹215/sh). Our revised TP is ₹550 (19% upside). We maintain our Buy rating. The stock trades at 10.8x FY22F EV/EBITDA and 1.9x FY22F P/B. Among OMCs our pecking order is IOC > BPCL > HPCL.