Petrochemical Expansion At Bina And Renewable Ventures Will Secure Future Opportunities

Key Takeaways

• Expansion projects in petrochemicals and retail networks poised to boost revenue and market share significantly by 2030.
  
• Investments in renewable energy and strategic oil sourcing support sustainability and stabilize margins amid geopolitical challenges.
  
• Geopolitical tensions, currency depreciation, and capital expenditures could stress BPCL's margins, profitability, and liquidity amid operational and competitive challenges.

Catalysts

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

• The expansion of the ethylene cracker project at Bina is poised to meet the growing demand for petrochemicals. As the project progresses on schedule and financial closure has been achieved, this is expected to significantly boost revenue upon completion by FY 2028.
  
• The greenfield refinery and petrochemical complex in Andhra Pradesh, backed by a large-scale financial commitment, presents a growth opportunity that can impact earnings positively as it aims to add substantial refining and petrochemical capacities by 2030.
  
• Aggressive expansion in the retail network, including the mechanical completion of 183 CNG stations and the commissioning of over 1,000 retail outlets, is likely to increase market share and improve revenue streams in the future.
  
• The joint ventures in renewable energy and compressed biogas align with global sustainability trends and have the potential to generate new revenue streams, contributing to improved net margins by reducing reliance on traditional fossil fuels.
  
• Strategic oil sourcing adjustments, including reduced dependency on discounted Russian crude and securing alternative supplies from the Middle East, aim to stabilize crude costs, thus safeguarding net margins during fluctuating geopolitical circumstances.

Bharat Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharat Petroleum's revenue will grow by 1.5% annually over the next 3 years.
• Analysts are assuming Bharat Petroleum's profit margins will remain the same at 3.1% over the next 3 years.
• Analysts expect earnings to reach ₹143.8 billion (and earnings per share of ₹34.8) by about March 2028, up from ₹137.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹175.3 billion in earnings, and the most bearish expecting ₹105.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 8.6x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.78%, as per the Simply Wall St company report.

Bharat Petroleum Future Earnings Per Share Growth

Risks

• Sanctions on Russian oil and potential disruptions in Russian crude supply could increase BPCL's crude costs, negatively impacting margins. [Earnings, Net Margins]
  
• Potential reductions in the discount on Russian crude could lead to higher input costs if Russian supplies decrease or cease, thus affecting BPCL's profitability. [Earnings]
  
• Continued depreciation of the Indian rupee could increase the cost of imports, adding pressure to overall costs and impacting net margins. [Net Margins]
  
• Operational challenges like refinery shutdowns or lower-than-expected refinery throughput, along with industry competition, could affect BPCL's refining margins and market share adversely. [Revenue, Earnings]
  
• Significant capital expenditure commitments, such as the Bina petrochemical project and Andhra Pradesh refinery, could strain BPCL's financial resources in the short to medium term, affecting liquidity and potentially increasing the debt burden. [Net Margins, Earnings]

Valuation

• The analysts have a consensus price target of ₹332.531 for Bharat Petroleum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹440.0, and the most bearish reporting a price target of just ₹220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹4660.4 billion, earnings will come to ₹143.8 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 15.8%.
• Given the current share price of ₹273.01, the analyst price target of ₹332.53 is 17.9% higher.
• 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.