Rosneft-Essar Oil deal not to re-rate rival refiners, say analysts

The total enterprise value of the deal, inclusive of debt liabilities, is $12 billion

The $12-billion deal between the Rosneft-led consortium and Essar Oil would not lead to a re-rating of rival refiners in India, analysts said.

“While the deal may be at a premium, I do not see a case of re-rating of Indian refiners,” said Ritesh Gupta, analyst with Ambit Capital.

Rosneft, the Singapore-based trading firm Trafigura and Russian financial investor UCP agreed earlier this month to acquire a combined 97.4 per cent stake in Essar Oil’s refining and retail assets, the Vadinar port and related infrastructure.  Of the $12 billion, $10.9 bn was for Essar Oil’s refining and retail assets. Essar Oil operates a 20 million tonne oil refinery at Vadinar in Gujarat. The total enterprise value of the deal, inclusive of debt liabilities, is $12 bn.

Five of the seven analysts Business Standard spoke to agreed there was no case for re-rating Hindustan Petroleum Corporation, Bharat Petroleum Corporation, Indian Oil Corporation and Reliance Industries, the listed rivals of Essar Oil in India. “Delisted firms always command a higher price,” said an oil and gas analyst with a brokerage firm who did not wish to be named. Essar Oil delisted in 2015 and 2 per cent of its equity remains with public shareholders who did not participate in it.

“The open offer to buy back shares is also a reason for the valuation Essar Oil received. It would be wrong to use it as a parameter to value other listed refiners,” said a second analyst. Other analysts did not see the valuation for Essar Oil’s refining business as high enough to raise an alarm. 

The S&P BSE oil and gas index has gained 30.3 per cent in the last 12 months. Reliance Industries has gained 12.9 per cent in the past year, IOC has gained 61.1 per cent, BPCL 43.9 per cent, and HPCL 63.5 per cent.  Better refining margins due to an increase in demand for petroleum products on lower crude oil prices has contributed to this buoyancy in energy scrips. The Essar Oil deal is seen as a reassurance for current valuations of these stocks. “It instills confidence for the existing valuations of these stocks,” Gupta said. 

“In a buoyant market, one looks for reasons to increase valuations,” said another analyst.