BPCL conundrum: Govt sure of good returns, but says it's race against time

Govt officials and industry experts confident that the Centre's stake in BPCL can be sold at a premium of 20-30%

The planned privatisation of Bharat Petroleum Corporation (BPCL) has led to a problem for those in the government tasked to execute a deal. 

While officials are confident that BPCL has the attractiveness to garner proceeds at a healthy premium for the exchequer, they are less so when it comes to the deal being completed before March 31, 2020 and, hence, being counted in 2019-20 divestment proceeds.

Last week, the Union Cabinet cleared the sale of the government’s entire 53.29 per cent stake in BPCL. The plan excludes BPCL’s 61.65 per cent stake in the Numaligarh refinery in Assam. That will be taken by some 

other state-owned oil company, ensuring Numaligarh stays with the Centre, Finance Minister Nirmala Sitharaman had said.

Government and oil industry officials, as well as sector analysts, are confident that the Centre’s stake in BPCL could be sold at a premium of 20-30 per cent. They point to its strong fundamentals, oil marketing network and  attractiveness of other core businesses like refining, pipelines and petrochemicals. BPCL investments include stakes in Indraprastha Gas, Petronet, and Oil India.

Saudi Aramco, Reliance Industries, Total and Exxon Mobil are among the entities expected to be keen on BPCL. 

At Friday’s closing price, the Centre’s stake in BPCL is valued at around Rs 58,863 crore. A premium of 20-30 per cent at that price could take the deal value to around Rs 70,600-76,500 crore.

Premium pricing

“For any global oil major, BPCL is an attractive proposition, given the access it provides to the Indian markets at a time when the country’s energy needs are only increasing,” said an official who has been involved with the process since the sale was first mooted within the government. The official said that was sometime in February.

A Mumbai-based analyst told Business Standard the value of BPCL is likely to have a 20 per cent premium on the current market price. Based on one estimate, the target price is likely to be around Rs 590 a share — of which Rs 448 comes from the core business and Rs 142 for investments in Indraprastha Gas and Petronet LNG.

“With Numaligarh being kept out, the prospects for BPCL seem good. It has some good investments in Petronet and Indraprastha Gas, and also a good gas vertical and E&P (exploration and production) presence,” said K Ravichandran, senior vice-president at ratings agency ICRA.

Of the total of 249.4 million tonnes per annum (mtpa) refining capacity in India, BPCL’s across its Mumbai, Kochi and Bina refineries is 35.3 mtpa; Numaligarh is 3 mtpa. The company has 15,289 retail outlets in the country.

By the end of the first half of this financial year, BPCL’s borrowings were Rs 31,756 crore. For the year, it has targeted a capital expenditure of Rs 7,900 crore, of which Rs 4,464 crore was achieved in the first seven months.

The department of investment and public asset management (Dipam) has been given its highest ever divestment target for a year, of Rs 1.05 trillion. So far, it has garnered Rs 17,400 crore, with a little more than four months left.

Thus, if the BPCL deal can be concluded before March 31, that will be a huge boost for the government, counting on divestment targets being met or even exceeded to offset some of the tax revenue shortfall expected in a year of economic slowdown.

‘Deal can’t be rushed’

This is where officials are being realistic, especially since the prime minister’s office has made it clear that BPCL’s will be a proper divestment to a private company, not a sale to another public sector undertaking (PSU).

“Apart from NEEPCO and THDC, which are being sold to NTPC, all the other PSUs up for privatisation should be sold to non-government entities. That message is clear from the top. Otherwise, it becomes a futile exercise of taking money from one government entity and putting it into another, just to meet divestment targets on paper,” a second official said.

Officials say that had the Centre’s stake in BPCL been earmarked for sale to another PSU, as the ONGC-Hindustan Petroleum deal in 2017-18, the transaction would have concluded much faster, since due-diligence would have taken less time. In the case of BPCL, the process of appointing transaction and legal advisors and asset valuers is ongoing, with the last date for bids extended till Monday, November 25. After appointment of these entities, there will be roadshows and Dipam will issue preliminary information memoranda, to invite Expressions of Interest from potential buyers. The queries that these bidders have will be addressed, and the final buying company or consortium will then be identified.

“The process takes time. Given the strategic importance of the deal, one cannot rush with it. It is about balancing between meeting divestment targets or getting the best value for the exchequer out of BPCL,” said the first official quoted earlier.

Officials say if the deal is to be carried out and concluded in the best possible manner, then yearly targets should not be the consideration, and the proceeds might reflect in next year’s divestment targets.

“BPCL is waiting for directions from the government. Asset, legal and transaction advisors for the deal are likely to be finalised on Monday,” said a source. The government has given 50 days for asset valuing, which means the report in this regard must come within the first half of January. After this, price bids may be invited from potential buyers. Some indicate the company might also exit from the Bina refinery, in which Oman 

Oil Company holds 50 per cent, before the stake sale — the foreign major has the first right of refusal in such a case.