Margins to improve due to crash in crude prices – Mr Surana, BPCL

Update on the Indian Equity Market:

On Monday, NIFTY50 closed 7.6% lower at 9,199, erasing the gains of Friday. All sectoral indices closed in the red with METAL (-8.9%), PVT BANK (-8.8%) and BANK (-8.3%) being impacted the most. Of the NIFTY50 components, INDUSINDBK (-18.4%), JSWSTEEL (-14.8%) and VEDL (-10.9%) were the worst performers. YESBANK was the only index component to close in the green with a 45% gain.

Margins to improve due to crash in crude prices – Mr Surana, BPCL

Excerpts from an interview with Mr M K Surana, Chairman and MD, Hindustan Petroleum Corporation Ltd. (HPCL) with CNBC -TV18 dated 9th March 2020:

  • The crash in crude prices is governed by factors different than those which are normally seen. The crash is abnormal, sharp and not guided by purely demand-side factors.
  • Mr Surana expects that in the near term, there will be softness in most Middle East crudes. This may lead to better margins on refining side in the near term. Brent Dubai differential may increase slightly, making Middle East crude slightly more favourable from refining point of view.
  • The lower crude price is good for refiners and means better margins in the near future. But the choppiness will not be correcting.
  • The gross refining margins (GRMs) and the cracks were low in the recent past. But in this particular event, the Saudi crude has reduced OSP by almost USD 6 per barrel in all markets and not just Asian markets. That should improve the cracks in the near future. In fact, the 6th March vs 9th March futures/forwards are already seeing a little jump of cracks.
  • The BPCL divestment impact on industry dynamics depends on how the divestment proceeds. Assuming private players are involved, there may be certain changes in the way businesses are picked up.
  • Sudden fall in crude causes inventory losses. However, there are still 20 days in March (at the time of the interview). After such a sudden fall, a pick up if it happens is also sharp. So, we may see days of gains also in March so the inventory will depend on the net price. However, on the margins, they are expected to be better in nearer months.
  • On the demand in India, February was better than earlier months for both diesel and petrol. Mr Surana was of the view that it is difficult to identify where the demand is coming from as many factors are working in contradictory directions.
  • As far as the Coronavirus impact is concerned, there was no impact in India in February. It is only now that concerns are being raised.

Consensus Estimate: (Source: market screener and websites)

  • The closing price of BPCL was ₹ 365/- as of 16-March-2020.  It traded at 10.9x/8.6x/8.2x the consensus earnings estimate of ₹ 33.4/ 42.4 /44.5 for FY20E/21E/22E respectively.
  • The consensus target price for BPCL is ₹ 506/- which implies a PE multiple of 11.4x on FY22E EPS of ₹ 44.5/-.