Declining Fossil Demand And Rising Costs Will Undermine Viability

Key Takeaways

• The global energy transition and rise of electric vehicles threaten Bharat Petroleum's core business, causing long-term declines in revenue and profitability.
  
• High capital commitments and regulatory uncertainty add pressure on margins, cash flows, and financing, increasing risks to earnings and shareholder returns.
  
• Expansion of refining capacity, digital initiatives, and diversification into renewables position the company for stable growth and resilience amid evolving energy market trends.

Catalysts

Primarily engages in refining crude oil and marketing petroleum products in India and internationally.

• Bharat Petroleum faces a long-term decline in its core market as the global shift towards renewable energy and decarbonization intensifies, which will structurally reduce demand for fossil fuels and undermine the company's revenue growth over the coming decade.
  
• The rapidly accelerating adoption of electric vehicles in India, coupled with advancements in battery technology, will erode gasoline and diesel consumption, causing BPCL's downstream fuel sales volumes and market share to diminish, depressing topline revenue and reducing profitability.
  
• Increased ESG scrutiny and fossil-fuel divestment by global investors are likely to raise BPCL's cost of capital and restrict future access to financing, which will pressure net margins and dampen the company's ability to fund growth projects.
  
• BPCL's heavy dependence on government price controls and subsidies for key products like LPG exposes it to ongoing margin volatility and regulatory uncertainty, potentially suppressing net margins and destabilizing earnings, especially as under-recoveries remain unresolved.
  
• Substantial capital expenditure commitments for refinery upgrades, greenfield projects, and delayed overseas initiatives (such as the Mozambique LNG project, already requiring significant impairments and facing cost escalation) threaten to erode free cash flows and increase the company's leverage, putting at risk both earnings stability and future shareholder returns.

Bharat Petroleum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bharat Petroleum compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bharat Petroleum's revenue will decrease by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.0% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach ₹148.4 billion (and earnings per share of ₹34.37) by about August 2028, up from ₹133.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 10.4x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.1x.
• Analysts expect the number of shares outstanding to grow by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.93%, as per the Simply Wall St company report.

Bharat Petroleum Future Earnings Per Share Growth

Risks

• Continued expansion and modernization of refineries, as seen in the Bina and Kochi projects, is likely to improve operational efficiency and gross refining margins, which would support long-term earnings stability for Bharat Petroleum.
  
• Aggressive investments in network expansion, non-fuel retail offerings, and digital transformation (including over 1,800 new retail outlets, solarization of nearly 12,000 sites, and launch of BeCafe convenience stores) are expected to drive revenue growth, improve cost structures, and enhance customer loyalty, positively affecting both revenue and margin expansion over time.
  
• India's robust GDP growth projections, strong domestic demand for transport fuels, and a government focus on infrastructure development are powerful secular trends likely to underpin volume growth and support future revenues for BPCL.
  
• Strategic forays into alternative energy and city gas distribution, active participation in renewable projects (such as green hydrogen and compressed biogas joint ventures), and rising ethanol blending levels provide diversification avenues, helping BPCL to sustain or potentially grow its market share and revenues as energy transition accelerates.
  
• Government support in the form of compensation mechanisms for under-recoveries in LPG, ongoing deregulation initiatives, and favorable fuel pricing policies offer stability and profitability resilience, which may underpin net margins and overall financial health in the long term.

Valuation

• The assumed bearish price target for Bharat Petroleum is ₹230.29, which represents two standard deviations below the consensus price target of ₹357.61. This valuation is based on what can be assumed as the expectations of Bharat Petroleum's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹481.0, and the most bearish reporting a price target of just ₹220.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹4182.7 billion, earnings will come to ₹148.4 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 12.9%.
• Given the current share price of ₹319.45, the bearish analyst price target of ₹230.29 is 38.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.