Buying jewel in the crown: BPCL a revenue churner, not a drain on finances

Unlike Air India, the winning bidder for BPCL can easily bank on this revenue churner to recover the cost of acquisition

The crunch in tax revenues as a result of the pandemic has made privatisation an imperative rather than just a strategy for the Narendra Modi government. At the forefront of this move is Bharat Petroleum Corporation Ltd (BPCL) and Air India. Unlike the latter, the oil refining and marketing major is a revenue churner for the government rather than a drain on its finances. Nonetheless, the Union finance ministry’s silence around the submission of expressions of interest (EoIs) for BPCL casts doubts on whether the interested parties are good enough for handing over a public jewel.

Even a week after the EoI deadline ended on November 16, all that North Block has to say is that it has received “multiple” offers for BPCL. Bid sensitivity notwithstanding, shrouding the mere submission of EoI in secrecy defies logic. To add to it, the only company or investor that officially acknowledged showing interest is Anil Agarwal’s Vedanta. In a statement on November 18, Vedanta said the EoI was only exploratory in nature. There is also unconfirmed information that some financial investors, such as private equity and pension funds, have shown interest in buying a 52.98 per cent government stake in the company.

The big question is why Reliance Industries Ltd (RIL) and its partner Saudi Aramco and British Petroleum (BP) or Rosneft’s Nayara Energy (formerly Essar Oil after it was bought in 2017), have decided to stay away from buying the country’s second-largest automobile fuel retailer. Apart from the more obvious reason of the Covid-19-induced downturn that has left little cash in the hands of global oil companies, there is an underlying lack of interest among existing players in adding more million tonnes to refining capacity, especially in non-home countries.

In RIL’s case, it has already made it clear that it will expand only in its non oil-to-chemicals businesses housed in Reliance O2C Ltd, which was spun off as a subsidiary this year. Though petrochemicals continues to give the largest domestic private sector company good returns, it already has 60 million tonne of refining capacity under its wings. Its retail partner BP has no refining plans for India and Saudi Aramco is in no financial position to accomplish investments already committed in either RIL O2C or the Ratnagiri refinery of public sector oil marketing companies. In August 2019, RIL had said Saudi Aramco will acquire 20 per cent stake in Reliance O2C Ltd which will comprise its refining and petrochemical business, bulk and wholesale fuel marketing, and 51 per cent interest in the fuel retail venture with BP.

The Adani group, which showed interest in fuel retailing by partnering with French major Total, is anticipated to make an entry in the liquid fuel business, too. It already has a presence in the natural gas market and city gas distribution business. It is surprising, though, that Adani has not acknowledged putting in an EOI (its spokesperson says “no comments” to queries on whether the group has interest in BPCL). Adani, however, already needs a war chest for its airport business. With plans to branch out into private rail business while incurring heavy debt on power portfolio, it has little appetite for an over Rs 44,000 crore investment in BPCL unless it partners with a financier who is ready to take an oil bet.

Even for Vedanta, the going will not be easy. The group has a precedent of withdrawing from the race for Essar Steel when the bidding for it under the Insolvency and Bankruptcy Code became too expensive for it.

Nonetheless, Morgan Stanley in a November 18 report said Vedanta has a track record of successfully creating value out of state-owned assets, and it could bring in other partners to reduce the risk. At the same time, it acknowledges that an EoI does not automatically translate into an actual bid and Vedanta could very well drop off in the financial round. While expressing surprise at Vedanta’s move, the report said it sees logic behind the transactions “given that BPCL dividends could easily cover the cost of debt of any acquisition”. It said while it would be difficult for Vedanta to secure funding because of debt leverage both at the company and group level, Vedanta could create a ring-fenced special purpose structure where the debt is secured by the BPCL stake and serviced by dividends from it.

In Morgan Stanley’s analysis, an all-in 75 per cent acquisition of BPCL, including the open offer, will cost Vedanta Rs 64,200-97,600 crore based on a price of Rs 395-600. After assuming Vedanta sells BPCL equity in Indraprastha Gas Ltd, Petronet LNG and some other companies, the net cost of the acquisition would still be Rs 52,200-85,500 crore. “At 8 per cent interest, the interest cost would range from Rs 4,100-6,800 crore. On our conservative FY23 standalone earnings estimates, even at a 75 per cent dividend payout, this would service the debt cost even assuming the dividend income is taxed at 25 per cent,” the report said. This does not take into account any additional divestment such as selling the Mozambique LNG stake or additional profits if BPCL acquires management control of the Bina Oil and Refineries Ltd or any further asset sales. What the report, however, does not acknowledge is the fact that Vedanta seldom likes to ring-fence its businesses.

Given that foreign oil companies have not shown interest in BPCL and if Adani is in the fray, it will bring Vedanta face to face with a group whose chips are not as down as that of Anil Agarwal’s. Assuming that any of these two groups, with either backing of Total or a financial investor successfully bid for BPCL, it is bound to change the dynamics of the market for Indian Oil Corporation, Hindustan Petroleum Corporation and Mangalore Refinery & Petrochemicals (MRPL) and even for private players RIL and Nayara Energy. This is so because BPCL, on its own has 36 million tonne refining capacity — excluding the Numaligarh Refinery which is expected to go through a separate sale to a public sector undertaking. BPCL’s refineries in Kochi and Bina give access to hinterland which is not catered to by any other player. Besides, BPCL has 16,492 retail outlets and 72 million LPG customers making it a prized asset for any new player.