BPCL Share price: Jefferies Reiterate Buy rating with target of Rs 500

BPCL (Bharat Petroleum) sold its stake in Numaligarh refinery for Rs 99 bn, higher than estimate by Jefferies of Rs 84bn. The positive surprise is 1.5% of BPCL's current market cap. After paying capital gains tax (Rs 9.4bn calc) it could use the proceeds to pay for the equity stake purchase in BORL and pay out the rest as one time dividend (Rs 30/shr calc). Or it could use it to retire long term debt and add 4% to annual PBT. Jefferies Reiterate Buy with price target of Rs 500. BPCL share price today is Rs 473, up Rs 18 or 4%. 

BPCL Stake sale at favorable valuation:

The majority stake in NRL was sold at 7x FY21E EV/EBITDA, higher than our estimate (6x) and in line with our target valuation multiple for BPCL standalone entities refineries at Mumbai and Kochi. The stake was purchased by a consortium of Oil India, Engineers India and government of Assam and is in line with BPCL's preparation for privatization in FY22E.

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Proceeds could be used for one time dividend:

After paying capital gains tax on the transaction (Rs 9.4 bn calculated as carrying value of NRL investment is Rs 4.5 bn in balance sheet), BPCL could use the rest of the proceeds for the equity stake acquisition of Bharat Oman Refineries (Rs 24 bn) and pay out one-time dividend of Rs 30/share (calc). This works out to an attractive 6.6% yield at the current price. The company has not stated its intentions.

If debt retired, should lead to 4% increment to recurring PBT:
If BPCL decides to retire debt with the surplus funds, it could lower annual interest outgo by Rs 4bn accreting to recurring earnings.

Reiterate Buy rating on BPCL:

Jefferies price target doesn't factor in any upside from privatization. Jefferies see rationalization of crude, transportation, retail network operations and employee costs that could drive 30-35% upside to recurring EBITDA.