Published on 6/09/2019 11:42:08 AM | Source: Prabhudas Lilladher Ltd

Buy Bharat Petroleum Corporation Ltd For Target Rs.466 - Prabhudas Lilladher Ltd

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Divestment blues!

We believe divestment of BPCL to private sector will help maximize revenue for the government (Rs847bn). Divestment to IOCL will create a behemoth although it is unlikely to alter market dynamics in the near term. While divestment to IOCL is the easy way out, real price discovery of BPCL will happen with stake sale to foreign/private players. Sale to IOCL will attract reasonable premium as HPCL transaction was done at ~18% premium. However, stake sale to any private/foreign major can value BPCL at Rs800/share and unlock value. BPCL stake sale will also remove the divestment overhang plaguing the PSU’s. We tweak our estimates post Annual report updation and other changes. We remain constructive on OMCs as they are well placed to benefit from benign crude oil prices and GRM improvement from IMO 2020 implementation. Reiterate BUY.


Event: Media reports of sale of BPCL

Media reports suggests that the government is looking to divest its 53.29% stake in BPCL to IOCL or even private players. BPCL is the second largest Oil Marketing Company (OMC) after IOCL and is one of the best managed PSU with presence across refining (33.2 MTPA or 13% of Indian refining), fuel retailing (14,977 stations or 23% of total outlets), E&P stakes in Mozambique, Brazil, Russia etc along with City Gas Distribution (CGD) stake in 17 Geographical Areas. Besides, BPCL is one of the promoters of IGL, Petronet etc. In this note, we look at various scenarios in terms of ownership change and its impact on competition landscape of India


Scenario 1- BPCL + IOCL-an energy behemoth:

Merger of BPCL with IOCL will create an energy behemoth with disproportionate share in the Indian energy market across refining, fuel retailing and City Gas Distribution (CGD) players. This will be an easiest way out for the government to raise money to meet part of their divestment target of ~Rs1trn. However, such high share might invite attention of the Competition Commission as this run contrary to government intention to bring in more competition in fuel retailing and reduce fuel prices.


Synergy in refining and product sourcing:

In terms of synergy, there is lot of overlap in fuel retailing business and major savings can be achieved by way of coordinated marketing plans. However, in refining, while IOCL is predominantly strong in North and East India and has stake in Chennai Petroleum (11.5MTPA), BPCL is a sizeable player in high growth West and South India. BPCL also has 50% stake in Central India based Bina refinery (7.8MTPA) and 62% stake in North East based Numaligarh refinery (3MTPA). Crude sourcing is another area where there is immense scope for cooperation.


Funding the acquisition not a concern:

Funding the BPCL stake by IOC will not be a major concern, as IOC’s net debt to equity stands comfortable at 0.55x. Besides, IOCL also holds value accretive stakes in ONGC, GAIL and OIL India (current value Rs137bn). In addition, BPCL has a much better earnings profile with ROEs of >20% vis-à-vis 15% for IOCL.


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