In this article we will try to analyze Bharat Petroleum Corporation Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this fundamental analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Dated: 20 Sep 23
Company: Bharat Petroleum Corporation Ltd.
CMP: Rs. 360.25
Market Capitalisation: Rs. 78147.33 Cr.

Intrinsic Value of Bharat Petroleum Corporation Ltd.

Bharat Petroleum Corporation Ltd. is a leading player in the Indian petroleum industry.  It has a significant presence in refining, with refineries located in Mumbai, Kochi and Bina. They produce a wide range of products including gasoline, diesel, aviation turbine fuel and petrochemicals. The company also has an extensive retail network of fuel stations and LPG distributors. Though the company has its operations mainly in Bharat, it is now expanding operations internationally. The company is also exploring renewable energy options such as electric vehicle charging stations and bio fuels.

Note: Here we are carrying out only the quantitative fundamental analysis of Bharat Petroleum Corporation Ltd. as the qualitative analysis is more subjective and individual views may vary vastly.

Before we enter into the calculation of Intrinsic value of Bharat Petroleum Corporation Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.

Assumptions:

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.

• Free cash flow will be 2% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.02. We assume that this ratio will hold good for future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Free Cash Flow Growth Model
Intrinsic Value:  Rs. 327.58
Stock Entry price with 25% margin of safety: Rs. 245.68

Revenue Growth Model
Intrinsic Value: Rs. 504.51
Stock Entry price with 25% margin of safety: Rs. 378.38

The intrinsic values arrived above are not the same since the Free Cash Flow model considers a pessimistic starting base value of present free cash flow for extrapolation whereas the Revenue Growth model takes the actual point on the extrapolation line for the current year. The average of the above two stock entry prices works out to be Rs. 312.03. When the stock starts trading below this price it becomes attractive for long term investment. This value is valid till the next financial year results are published or some major fundamental change takes place in the company.

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Fundamental Analysis Of Bharat Petroleum Corporation Ltd.

Leverage Ratios

Observations:

1. The company is operating with high leverage as is evident from Debt/Equity ratio.

Operating Ratios

Observations:

1. The company is operating with negative working capital however, this is due to the fact that the trade payable constitute about 30% of the current liabilities. So a negative working capital is not worrisome in this case.
2. The company has improved its receivable turnover ratio indicating that it is collecting its dues from market efficiently.

Profitability Ratios

Observations:

1. The company is operating on thin margins and there also we see a decline during the period.
2. We see decline in PAT and EBITDA during this period.

Author
Jibu Dharmapalan
Fundamental Analyst

Disclaimer:
This article is for educational purpose only. Investment in securities market is subject to market risks. Please consult your Financial Advisor before investing.

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References:
https://www.bseindia.com/stock-share-price/bharat-petroleum-corporation-ltd/bpcl/500547/financials-annual-reports/
https://www.bharatpetroleum.in/bharat-petroleum-for/Investors/Financial-Performance/Annual-Reports.aspx

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FAQs

What is Intrinsic Value?

Ans: When someone invests in an asset, he does so in order to earn money from the business. The investor gets paid over a period of time as long as he is invested in the asset. Now intrinsic value is the present value of all such future cash flows generated by the asset. So logically one should not invest in any asset if the ask price is more than the intrinsic value of the asset.

How is Intrinsic Value of a company calculated?

Ans: For calculating the intrinsic value of a company all its future cash flows are extrapolated based on the past performance of the company, assumptions about the future growth of the company and its terminal value. Once all these are calculated these are brought to the present date based on appropriate discounting rate. The sum of all these gives the intrinsic value of the company. It may be more or less than the market capitalization of the company. If it is more than the market capitalization of the company then the company is said to be undervalued and is a good bet as a long-term investment and vice versa.

How is Intrinsic Value of a share calculated?

Ans: Once intrinsic value of a company is calculated as explained above, it is divided by the total number of outstanding shares of the company. This gives the intrinsic value of a share.

What is Discounted Cash Flow?

Ans: When we have cash flows that are spread over a period of time then Discounted Cash Flow method is used to calculate present value of all such cash flows. The present value depends on the discounting rate used. Usually 10 year Government bond yield rate(risk free rate of return) is used as the discounting rate.