OIL SHARE IN NEWS : Buy HPCL and BPCL

HPCL – Upgraded to ‘buy’ with Target Price of Rs.420

 Hindustan Petroleum (HPCL) has been upgraded to ‘buy’ from the earlier ‘reduce’ recommendation. The target price is Rs.420 over one year. The stock is currently traded in the range of Rs.362.

 The upgrade is based on potential decline in subsidy burden and recent decline in share price despite favorable crude outlook for oil marketing companies.

 Over the last one year, HPCL stock has fallen by 11% versus 9% drop in the market.

 Besides all the above, duty cuts and fuel price hikes have assisted oil marketing companies to reduce under- recoveries.

 HPCL is favored over BPCL because of improved EBITDA of HPCL in the event of declining oil prices. As the oil prices are falling, HPCL is expected to generate 70% EBITDA from its marketing business while it is expected at 55% for BPCL.

 The stock is attractive on valuation front as well. Standalone basis, the stock is currently traded at 0.8 multiple of FY12 expected P/BV as against its five year average of 0.9 P/BV.

 Apart from upgrading the stock to ‘buy’ from ‘reduce’, the target price has also been hiked to Rs.420 from Rs.366 earlier.

 The standalone business is expected to contribute Rs.356 to the target price and the rest is expected to come from investment in MRPL and Oil India Limited.

BPCL – Upgraded to ‘hold’ from ‘reduce’ –TP Rs.695

 BPCL has been upgraded to ‘hold’ from the earlier recommendation to ‘reduce’. TP has been revised upward from Rs.547 to Rs.695.

 The share has not been upgraded to ‘buy’ because positives on the exploration and production front have already reflected in the current price of the stock. As against 9% fall in the market over the last one year, the stock price has gained by around 8% at the current valuation of Rs.656 range.

 For the near term, no major triggers are visible on the exploration and production (E&P) front and hence major upside on the stock price is unlikely.

 Company’s lower exposure to marketing is another factor limiting the upside.

 However, softening crude prices, lower subsidy burden and reduced under- recoveries are minor positives that may help the stock to some extent.