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In the near term, better marketing margins on auto fuels may offset refining business’ weakness
In the near term, better marketing margins on auto fuels may offset refining business’ weakness

Near-term outlook dull for BPCL, progress on divestment is crucial

  • The govt wants to sell its stake in BPCL but has extended the EoI deadline for the fourth time
  • The delays are disappointing as the stock was earlier building a decent premium, say experts

The government has extended the deadline for the submission of expression of interest (EoI) for state-owned Bharat Petroleum Corp. Ltd’s (BPCL) privatization to 16 November. This is the fourth time that the deadline has been extended.

Additionally, last week, a Reuters news report citing sources said Rosneft and Saudi Aramco are unlikely to bid in BPCL’s privatization, as low oil prices and weak fuel demand curb their investment plans. This news flow took BPCL’s shares down by nearly 9% in a single day on NSE.

The government wants to sell its 53% stake in BPCL. The divestment news flow has been a driver for the stock for a while now. In July, the BPCL stock had rallied as much as 25% in four trading days as sentiments got a boost on reports that many global firms intend to bid for the stake.

Not so refined
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Not so refined

“These developments (the delays in the divestment process) are disappointing, as the BPCL stock was earlier building in a decent premium because of the anticipated privatization," said analyst with a domestic brokerage firm, requesting anonymity. As of now, BPCL’s shares have corrected by 35% from their annual high in November, underperforming broader indices.

“The extension of deadline makes the deal very unlikely to be completed in FY2021," according to another analyst with a multinational brokerage firm, also requesting anonymity.

One of the reasons for the delay in the BPCL privatization is the general decline in deal activity following the coronavirus outbreak. The number of global cross-border merger and acquisition deals from April to September 2020 stood at 5,201, according to data from Refinitiv. The number from the same period of the previous year was 7,068.

Analysts are, however, optimistic about the potential gains for BPCL from privatization. “A global major with a well-recognized brand as a potential new owner could usher in faster growth, operating leverage gains, cost savings, and a gradual increase in premium auto fuel acceptance, driving significant improvement in profitability and return ratios over the medium term," said analysts from Jefferies India Pvt. Ltd in a report on 23 September.

The brokerage firm projects a 30% earnings per share upside in financial year 2025 in this scenario.

In the near-term, the BPCL stock is likely to take cues from the earnings outlook. Here, the refining business is expected to stay subdued as the pandemic weighs on the demand of petroleum products, which in turn would keep refining margins low.

Besides, the pace of volume recovery would depend on how demand shapes up.

There is a silver lining, however. Better marketing margins on auto fuels would offset the weakness in the refining business, according to analysts. Still, this may not be enough for meaningful upsides in the BPCL stock, despite its inexpensive valuations.

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