BPCL stock gains ground as govt's divestment process gathers steam

The divestment of BPCL, leading to value unlocking for investors, remains the larger trigger for the stock

The Centre’s move to divest stake in Bharat Petroleum Corporation (BPCL) is picking up pace, fuelling investor interest once again.

BPCL shares jumped 12 per cent on Friday, following the Department of Investment and Public Asset Management’s (Dipam’s) detailed response to initial queries by potential bidders.
 

The development is a strong indicator that the privatisation process still is on the government’s agenda.

While analysts feel the July 31 deadline for submission of expression of interest (EoI) may be extended, the Street has factored in completion of the process in FY21 itself, driven by the tight fiscal situation.

Divestment in BPCL — which will lead to value-unlocking for investors — remains the strongest trigger. Shares could jump higher as the divestment progresses.

The government’s clarification that all businesses of BPCL (including its gas assets) will be part of the deal is an icing on the cake, say analysts.

BPCL has a vast retail network (20 per cent share in retail petroleum products business) and huge refining capacities, while hydrocarbon exploration and production (E&P) assets remain attractive for global players vying for a pie of the Indian fuel market.

Actual submission of EoIs, which will provide clarity on potential bidders, will be the next milestone. Though asset price discovery will take place later, analysts have, for now, pegged the stock at Rs 550, given that both upstream and downstream assets are part of the deal.

 

 

BPCL shares had scaled similar levels in November last year, before the divestment process faced a temporary halt.

An analyst at a foreign brokerage said the target price of Rs 500 was based on the acquisition premium. However, the valuation based on BPCL’s assets could be much higher, which is what potential buyers would consider.

A buyer with a long-term horizon is likely to pay a premium, given the head-start it would get over others.

Analysts expect Reliance Industries (RIL) to enter the race — given that it is now net debt-free — besides Saudi Aramco, Rosneft, ExxonMobil, and ADNOC.

For the government’s 53 per cent stake and open offer for 26 per cent, one would have to shell out Rs 94,000 crore at Rs 550 a share, said analysts at Emkay Research. They added that if BP participates (as RIL’s partner), the consideration for RIL could be under Rs 50,000 crore.

Conversely, if RIL decided to bid solo and emerges the winner, it could re-pitch the oil-to-chemicals business to Aramco at a higher valuation, and eventually self-fund BPCL’s acquisition.
 

Some analysts, such as Yogesh Patil at Reliance Securities, don’t expect RIL to bid, given it is focusing more on Jio and its retail businesses. However, progress on the divestment front will spur BPCL’s jump on the bourses.

Prospects for oil marketing companies have improved after the lockdown, which had impacted demand in April and May. Given that demand for auto fuel is improving, price hikes taken by companies recently will aid their financials and marketing margins.