Home / Markets / Mark To Market /  Unexciting privatization news flow keeps a check on BPCL’s share price

About a year ago, shares of state-run Bharat Petroleum Corp. Ltd (BPCL) rallied to more than 500 on the back of hopes around its proposed privatization. But the stock has since given up most of those gains, and now trades at less than 400, with the one-year return at -22%.

Last week, government officials said, “multiple" expressions of interest (EoI) were received for the BPCL stake. Vedanta Ltd, one of the interested entities, said its EoI for BPCL is merely exploratory in nature. Further, according to news reports, a foreign major player and two private funds are also in the race. The BPCL stock has declined around 5% since 16 November, which was the deadline to submit the EoI. “No big global names or even Reliance Industries Ltd are reported to have submitted the EoI so far. That’s a disappointment for investors," said an analyst at a domestic brokerage, requesting anonymity.

It remains to be seen if the suitors that have lined up pay top dollar for the asset. Analysts are surprised at Vedanta’s interest in BPCL, especially considering the parent already has a high debt on books.

Unrefined performance
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Unrefined performance

“While Vedanta on a consolidated basis is not very levered, the key question has been the leverage at the unlisted parent and the inter-company loans to the parent (currently at about $1 billion). However, an SPV (special purpose vehicle) structure which is ring-fenced and services the debt from dividends from BPCL could be possible, in our view," Pinakin Parekh, an analyst at J.P. Morgan India Pvt. Ltd, wrote in an 18 November note to clients.

Nevertheless, given its debt constraints, it remains to be seen whether Vedanta would pay valuations of more than 500 a share for the BPCL acquisition, which is where market expectations are, according to analysts. BPCL’s current share price is about 394.

The pandemic and the ensuing impact on demand have hit valuations of oil marketing companies—shares of Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC) have fallen 27% and 35%, respectively, compared to their highs in January.

In any case, the refining business has limited long-term growth opportunities, considering the rising importance of cleaner fuels such as CNG (compressed natural gas) or renewable energy. Furthermore, the regulated nature of the business and the history of government action on pricing appears to be a worry as well and seems to be a factor keeping large corporations away from the bidding process.

As such, delays in the privatization are a risk for the BPCL stock. Meanwhile, the near-term outlook for marketing margins is better for Indian oil marketing companies (OMCs).

“All the three oil marketing companies stand to gain from better marketing margin for financial year 2021, even as refining margins remain weak. But it’s a matter of time before refining margins also start to recover," said Varatharajan Sivasankaran, senior vice-president, Systematix Shares and Stocks (I) Ltd.

The silver lining for BPCL investors is that its shares trade at reasonable valuations, after the correction in the past year. “Even excluding the potential boost to valuations from the privatization, BPCL shares are not too pricey," said Sivasankaran.

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