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Bharat Petroleum Corporation share price gained over 5% in morning trade to hit 52-week high. Jefferies India Pvt Ltd has upgraded BPCL stock to BUY with a target price of $890. Since the share price of BPCL is trading close to $670 levels, Jefferies’ price target for BPCL indicates an upside of over 30% for the stock.
Jefferies analysts said range-bound oil prices and the government staying away from auto fuel prices have caused OMCs (Oil Marketing Companies) to rally between 90% and 130%. since October. Red Sea disruptions have strengthened refining margins. BPCL according to Jefferies offers the highest margin of safety compared to its maximum cycle multiple. Its profits are less affected by possible losses in diesel sales until the national elections.
Here are 7 key reasons why Jefferies expects a more than 30% increase
1.The government has not intervened in retail prices: Fearing possible government intervention in the retail price of gasoline and diesel, as oil marketing companies’ marketing margins rose above regulatory levels in a busy December election season, the government did not intervene. Although margins have narrowed of late, the government has refrained from pushing for a price reduction, increasing confidence in estimated regulatory marketing margins for FY25.
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2. Oil price within a range: The price of oil has been in the range of $75-85 per barrel since November despite the geopolitical developments in Gaza and the unrest in the Red Sea, despite the latter accounting for 10% of global oil shipments. raw. Jefferies considers a significant oil price increase unlikely in fiscal 2024 unless OPEC+ changes its stance from voluntary to mandatory adherence to established production cut targets.
3. The strength of refining in the face of Red Sea disruptions is positive for the WTOs: The Red Sea route represents 14% of the world’s supply of refined products. Oil tanker transit through the Red Sea has fallen more than 50% since December. This has led to longer shipping times and delays in supplies, increasing diesel spreads by 40% since December. The forward curve suggests diesel spreads could remain elevated through the first quarter of FY25, Jefferies analysts said.
4. Diesel marketing losses: OMCs could be allowed to increase retail prices after the May elections to offset the negative impact.
Gasoline and diesel marketing margins have plummeted since $10 and $3.5 per liter respectively in December to $5.5 and $1.3 per liter currently. The resistance to the diesel crack has made the spot marketing margin negative $1.5 per liter currently (according to Jefferies calculations). The same will further hurt Hindustan Petroleum Corporation’s earnings before interest tax depreciation and amortization (Ebitda) due to its adverse refining to marketing ratio (0.54 times in estimated FY25). BPCL and IOCL with ratios of 0.7 times and 0.8 times respectively will see less impact in FY25 if refining strength continues. Additionally, Jefferies hopes that OMCs will be allowed to increase retail prices after the May elections to offset the negative impact.
5. Cycle High Multiples Leave Room for Higher Gains: OMCs enjoyed record-high multiples during the 2014-17 calendar year due to halving in crude oil price, with hopes of compounding growth in marketing margins as the government deregulated diesel pricing in 2015. Analysts at Jefferies say that assuming WTO multiples return to this past peak due to Goldilocks’ prospects of a comfortable oil price situation and strong profitability, they see an increase of over 36% for BPCL relative to at the current market price.
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6. Blue sky scenario: In the past, the government allowed OMCs to create integrated margins in refining and marketing within a reasonable range. Assuming a break from the past where OMCs are allowed to generate regulatory marketing margins in FY25, as well as benefit from high refining profitability, Jefferies sees a 43% upside for BPCL.
7. BPCL is trading at the biggest discount to its previous peak: BPCL offers the highest margin of safety compared to its maximum cycle multiple. Its profits will be less affected by possible losses in diesel sales until the national elections, Jefferies said.
Disclaimer: The opinions and recommendations above are those of individual analysts or brokerage firms, and not those of Mint. We advise investors to consult certified experts before making any investment decisions.
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