India's Renewable Transition Will Cripple Conventional Fuel Sales

Key Takeaways

• Structural threats from renewable energy transition and EV adoption risk long-term fuel volume declines, jeopardizing profitability and asset returns amid costly new investments.
  
• Regulatory pressures, waning government support, growing competition, and ESG-driven capital flight threaten margins, financial flexibility, and adaptation to industry shifts.
  
• Investments in capacity, clean energy, and reforms position BPCL for sustained growth, resilient margins, and enhanced efficiency amid supportive economic and policy trends.

Catalysts

Engages in refining crude oil and marketing petroleum products in India and internationally.

• The accelerated global transition to renewable energy and India's shift towards EV adoption pose a structural threat to Bharat Petroleum's core fuel sales, as evidenced by management noting that current EV charging station utilization is only at two percent, rendering their new energy investments unprofitable in the near to medium term. This trend risks long-term volume declines and severe revenue headwinds over time.
  
• Intensifying regulatory pressures, including potential for higher carbon taxes and mandated emissions compliance, will likely escalate long-run compliance costs and squeeze net margins for BPCL, especially as government incentives for fossil fuels wane and the company continues to face uncertainty on LPG under-recovery compensation and its timing.
  
• The company's massive multi-year capital expenditure pipeline-projected at 22,000 to 35,000 crore rupees annually through 2029-is heavily weighted towards refinery and petrochemical projects that may be at risk of cost overruns or delays. In a scenario where demand weakens due to secular decarbonization, these projects could result in underutilized assets and depressed return on capital employed, negatively impacting long-term earnings.
  
• Increasing competition from private refiners, international oil majors, and growing alternative energy entrants is eroding BPCL's pricing power in both retail and industrial fuel segments. Management's admission of ceding market share to competitors unwilling to participate in discounting indicates future revenue and margin risk, particularly if fuel market deregulation intensifies and price wars persist.
  
• Heightened ESG scrutiny and risk of institutional capital flight from the oil and gas sector may hamper BPCL's ability to fund its aggressive expansion and modernization plans at attractive rates. As global fund flows increasingly favor low-carbon and renewable assets, BPCL could face a structurally higher cost of capital and constrained financial flexibility, ultimately limiting capacity to grow earnings and adapt to industry change.

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 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.9% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach ₹124.8 billion (and earnings per share of ₹33.78) by about September 2028, down from ₹173.3 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 13.2x on those 2028 earnings, up from 8.0x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.82%, as per the Simply Wall St company report.

Bharat Petroleum Future Earnings Per Share Growth

Risks

• Sustained demand growth for fuels and petrochemicals is supported by India's strong economic outlook, rapid urbanization, expanding middle class, and robust transportation network investments, which is likely to underpin BPCL's core revenues over the long term.
  
• The company's aggressive capital expenditure program on capacity expansion, refinery modernization, and petrochemicals diversification positions BPCL to capture improving gross refining margins, higher product yields, and more robust earnings growth once these projects start contributing.
  
• BPCL is actively investing in clean energy and gas, including new CNG/PNG stations, partnerships for green hydrogen, renewable power projects, and compressed biogas, which may help offset the risks from an eventual energy transition and ensure that long-term revenue and margin streams remain resilient.
  
• The government's commitment to energy security, domestic refining, and recently announced compensation for under-recoveries on LPG sales increases cash flow predictability and reduces earnings volatility, protecting net margins and free cash flow generation over multiple years.
  
• Potential value unlocking from privatization, improved governance, and management reforms following the government's divestment plan could lead to operational efficiencies, superior capital allocation, and better return ratios, supporting improvements in BPCL's margins and overall earnings power.

Valuation

• The assumed bearish price target for Bharat Petroleum is ₹257.93, which represents two standard deviations below the consensus price target of ₹369.03. 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 ₹460.0, and the most bearish reporting a price target of just ₹240.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹4282.2 billion, earnings will come to ₹124.8 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 13.8%.
• Given the current share price of ₹317.95, the bearish analyst price target of ₹257.93 is 23.3% lower.
• 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.