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Energy Sources - Wake up you bargain hunters.

Jun 12, 2000

The oil industry as a whole is trading at low multiples, historically this industry has traded at a P/E of 14 and the international majors are trading at P/E levels of 15. The huge discount maybe due to the uncertainty regarding the proposed deregulation and disinvestment in the industry. It provides an attractive opportunity to bargain hunters. Although taking exposure to the industry maybe a good call, a company that one might want to consider is Bharat Petroleum Corporation Ltd. (BPCL). Over the past few years the company has made a concerted effort to evolve from a sleepy PSU to a more aggressive, market oriented institution and its effort stand vindicated by the market conferring a higher premium to the stock when compared to its counterparts.

A bullish sentiment on Bharat petroleum maybe justified for the following reasons:

  • As per the Nitish Sengupta committee report, stand alone refineries namely Kochi Refineries Ltd. and Numaligarh Refineries Ltd. should be merged with BPCL. This will add 10.5 m tonnes of refining capacity as well as offer logistical advantages. The industry is expected to be deregulated by April 2002, industry restructuring should probably be completed prior to that date.
  • As mentioned above the industry is expected to be deregulated, the Government has categorically stated that the oil industry is non-strategic and hence, privatisable. If the Government plans to divest its stake then deregulation cannot be rolled back if it expects a good price for sale of asset. Deregulation should increase marketing margins.
  • Disinvestment itself will result in better valuation of the stock as management shifts to private hands as one can expect business decisions to be taken on economic grounds.
  • The management has been proactive and is attempting retail thrust; it is aiming at branding its products and is also seeking to establish new revenue channels (convenient stores) from its retail outlets.
  • The historical relationship between GDP growth and oil product demand has been 1.2, should the economy grow at a rate of 6.5%, oil demand can be expected to grow by 7.8%. Hence, even if BPCLs expected earnings grow at industry rates its P/E of 4.6 is below this level.

In dealing with the Government it is hard to predict and this maybe the cause for its low valuation but for those who are willing to make a call on the Government, this stock offers a great opportunity. Should we ring the morning alarms for the bargain hunters?

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Sep 23, 2020 03:33 PM