Dalal Street Investments

BPCL + HPCL + IOC – SELL – Goldman Sachs

September 14, 2009

On the back of fuel pricing reform is unlikely at this stage, Glodman Sachs has come out with a bold report to SELL all the 3 Oil Marketing companies – BPCL, HPCL and Indian Oil.

The government will bear all cooking fuel losses while auto fuel losses would be shared by state-owned upstream companies and oil marketing companies and the proportion of subsidy sharing is not known.

The government has actually been bearing more subsidy than just cooking fuel losses since FY08, implying that its subsidy share will reduce going forward. It is possible that government is trying to reduce further issuance of oil bonds in order to reduce fiscal strain, in our view.

With no fuel pricing reforms, the profitability of OMCs has again become a function of oil price, on which, we are above-consensus bullish.

Glodman Analysts have downgraded all three OMCs to Sell from Neutral with potential downside of 24%-31% lower 12-m TPs, based on 6X FY11E EV/EBITDA.

Target price of HPCL is Rs 270 with fully diluted EPS expectations of Rs 27.23 and 31.20 for FY10 and FY11.

Target price of BPCL is Rs 420 with fully diluted EPS expectations of Rs 47.23 and 44.43 for FY10 and FY11.

Target price of IOC is Rs 470 with fully diluted EPS expectations of Rs 55.23 and 44.13 for FY10 and FY11.

Our Recommendation:
We do not cover these companies as they are heavily dependent on incompetent Government policies.


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