BPCL's investors may see more gains: Here are two possible triggers

Likely approval of 100% FDI and further progress on disinvestment are potential triggers

The sale of the government’s entire stake in Bharat Petroleum Corporation (BPCL) would be a test case for the disinvestment program. Unlike Hindustan Petroleum Corporation (HPCL), which was “sold” to ONGC, with the government transferring cash from ONGC’s Reserves and retaining control of both companies, this is a genuine disinvestment. 

The Q4 results show that BPCL has gained, like other PSU Oil Marketing companies, from inventory revaluation. But it also saw sales growth. BPCL reported PAT of Rs 11,940 crore for Q4, 2020-21, against a net loss of Rs 2,940 crore a year-ago. After excluding extraordinary items, the year-ago loss would be a loss of Rs 1,361 crore.

Revenue from sales rose 11.5 per cent year-on-year to Rs 76,882 crore. Refinery utilisation was up. The retail marketing margins on petrol and diesel were under pressure. Refinery utilisation will be cut to 86 per cent in Q1, 2021-22 to adjust for lower demand due to the second wave. BPCL reduced debt by 37 per cent in FY21 YoY, to around Rs 26,000 crore. Capex for 2021-22 is projected at Rs 12,000 crore.

The board approved a final dividend of Rs 58, including one-time special dividend of Rs 35. BPCL has already paid interim dividend of Rs 21 in two tranches. BPCL made Rs 9,876 crore from stake sale in Numaligarh Refinery, and had impairments of Rs 2,032.8 crore related to its subsidiary Bharat PetroResources. 
 

The net surplus is distributed by the special dividend. The Government holds 52.98 per cent stake, and apart from receiving the dividends, it will also receive about Rs 6,600 crore in Dividend Distribution Tax.

Reports indicate interested investors have been given access to the financials, for due diligence. According to the BPCL Director (Finance) N Vijayagopal, who emphasised that this is not an official statement, “If everything goes as per our plan, we expect the pre-bid formalities to get over by June. After that, the financial bids can be submitted by August. The SPAs (share purchase agreements) could be signed around September, and the transfer of cash may happen by December.” Officially, the target is to complete disinvestment by end FY 2021-22.

The government is considering two policy changes to expedite the sale. One is, 100 per cent FDI may be allowed. Second, the buyer will not be compelled to make open offers in corporates such as Petronet LNG and IGL, where BPCL holds 12.5 per cent stake and 22.5 per cent stake respectively and has promoter status. As per current rules, open offers would be forced upon a new owner of BPCL. BPCL has clarified that it doesn’t intend to sell those stakes. BPCL also holds a small stake in OIL. 

At the current market cap of Rs 1.02 trillion, the government stands to receive over Rs 52,000 crore. Most analysts are bullish. The current price of about Rs 470 is substantially lower than targets in the range of Rs 570-575 set by various brokerages. The Q1, 2021-22 is expected to be weak due to lower sales volumes. But inventory gains could continue to boost profits. So long as the news flow says, the disinvestment process is continuing without a hitch, there could be gains from this level.