Pace of divestment to set BPCL’s course on bourses

ET Intelligence Group: The stock of Bharat Petroleum Corporation (BPCL), the country’s second-largest state-owned oil marketing company, has gained over 30 per cent in the eight trading sessions up to October 1 following a possible stake sale by the government.

With this, its price-book multiple has shot to 2.8 compared with the 15-year average of 1.9. Also, its enterprise value is now 9.6 times the operating profit before depreciation and amortisation (EBITDA), which is among the highest globally. Given the sharp rise in its valuation, any further increase in the stock will depend upon the nature of divestment and how quickly it happens.

The government of India owns 53.3 per cent stake in BPCL valued for Rs 57,000 crore.

There are couple of reasons why BPCL holds an appeal to strategic investors. The company has nearly 24 per cent share in the country’s retail fuel market. Its retail outlets increased to 14802 in FY19 from 8692 in FY10, according to the company’s annual report. India is one of the few countries which will continue to show growth in petroleum products over the next decade notwithstanding the rising interest in electric vehicles. Therefore, a company with a quarter of the market share hold potential for investors.

In addition, RIL’s deal with BP in August for 49 per cent stake in the former’s fuel retailing business implies a valuation of Rs 10.4 crore per outlet, according to Elara Capital. This offers a great value for investors interested in BPCL.

The company also has better return ratios than peers. The 10-year average return of equity (RoE) of BPCL was 19.8 per cent compared with HPCL’s 17.4 per cent and IOC’s 14.1 per cent, according to Bloomberg.

BPCL has an efficient inventory management, which reduces the impact of fluctuations in crude oil prices. It has one of the highest proportions of the refining profit in the total operating profit. Hence, every $1 change in gross refining margin (GRM) results in a 15 per cent change in the company’s earnings.

It had a refining capacity of 31 million metric tonnes in FY19 and has plans to invest nearly Rs 16000 crore in its plant in Kochi to increase value addition in the petrochemical products.

The stock movement will depend on whether the strategic stake sale will result in an open offer Any open offer with higher than the market price for control premium (typically 20-25 per cent higher) would augur well for minority shareholders.

Although the government appears to fast-track the divestment process, it may be long drawn due to approvals needed from Parliament, and due diligence process. Moreover, if the government decided to sell the stake in tranches to several interested parties through an offer for sale, it may not trigger an open offer. This would be a negative for minority stakeholders.

For strategic investors, clarity on the oil subsidy payments and contribution to Pradhan Mantri Ujjwala Yojana will be crucial.