BPCL most lucrative among govt's divestment candidates, say analysts

The company should get good suitors as it is sitting on good infrastructure and has a stable business outlook; the valuation seems attractive

Of the central public sector enterprises (CPSEs) approved by the government for divestment, state-owned oil refining and marketing major Bharat Petroleum Corporation Ltd (BPCL) is the most lucrative, say analysts. This is despite the government’s plan to segregate Numaligarh refinery out of the oil & gas major before handing over controlling stake to a strategic buyer.

In a late-evening announcement, Finance Minister Nirmala Sitharaman said the Cabinet Committee on Economic Affairs (CCEA) had approved the sale of government stake in five major CPSEs — BPCL, Shipping Corporation of India SCI, Container Corporation of India (CONCOR), THDCIL, and NEEPCO. The government is to hand over management control in each of these divestments to the strategic buyer.

“Of the lot, BPCL will still get good suitors as the valuation seems attractive. The company is sitting on good infrastructure and has a stable business outlook. These should get a good response when put up for sale. The shipping sector, on the other hand, is not doing too well as a business the world over. So, SCI, in my view, may not be a hot property. Ditto for CONCOR,” says G Chokkalingam, founder and managing director, Equinomics Research.

Earlier in the day, BPCL shares had hit a new high of Rs 548 apiece, up 6 per cent in intra-day trade on bourses. The stock, however, settled 4.9 per cent higher at Rs 545 at close on BSE. Shipping Corporation of India, which had gained 11 per cent to Rs 69.65 in intra-day deals, ended the day at Rs 68 a share, up 9.3 per cent over its previous close.

Independent market analyst Ambareesh Baliga says these steps are in the right direction as the government has “no business to be in business”.

“This is a positive development in line with market expectations. These divestments, unlike earlier ones, are to strategic investors, along with transfer of management control. This will surely help in discovery of their real valuations. I think these are the first few steps in the right direction,” Baliga said.

As regards an investment strategy, Chokkalingam suggests investors stay put for now and wait for suitors to queue up. It is only then, he says, that the true value of these CPSEs will be discovered, helping the stocks gain more ground, especially in the case of BPCL.

Strategic divestment of oil marketing companies (OMCs) to private parties, analysts say, is generally filled with fantasies of rich valuations. A stake in any of the OMCs in India will provide the buyer ready access to the third-largest and one of the fastest-growing petroleum markets globally.

India, according to reports, is the third-largest petroleum consumer in the world, next only to the US and China, with a consumption of around 5,200 barrels of oil per day. During 2013-18, consumption of petroleum products in India grew at a compound annual rate (CAGR) of 6.4 per cent, against 1.6 per cent in the US, 5.2 per cent in China, and negative 3.5 per cent in Japan, says a report from Motilal Oswal Securities.

“BPCL trades at 2.4x FY20 price-to-book (PBV) and 10.7x FY20 EV/Ebitda. Compared with this, global peers trade at 1.2x FY20 PBV and 6.7x FY 20 EV/Ebitda. Lack of clarity on continuation of subsidies on cooking gas and kerosene, complexities involved in dealing with subsidiaries and joint ventures, high employee cost and lack of sufficient time if the transaction needs to be completed before FY20-end are some of the key challenges that remain,” wrote Swarnendu Bhushan and Sarfraz Bhimani, analysts tracking the company at Motilal Oswal Securities, in a recent report.