The government has appointed Deloitte Touche Tohmatsu Ltd as the adviser for the strategic sale of Bharat Petroleum Corp. Ltd (BPCL), according to a news report last week. The sale of its 53% stake in BPCL remains crucial for the government to meet the divestment target of ₹1.05 trillion for FY20. At the current price of ₹511.45, the stake sale can fetch about ₹59,000 crore.
However, the government said BPCL’s 61.6% stake in Numaligarh Refinery Ltd (NRL) will be transferred to a public sector oil company, and will not be part of the deal. Even so, there are high expectations from the stake sale.
Analysts at ICICI Securities Ltd said: “In the event of privatization of BPCL (excluding its equity stake in NRL) through competitive bidding, we estimate BPCL to be valued at: 1) ₹488/share based on 8 times FY20E EV/Ebitda, 2) ₹630/share based on 8 times FY21E EV/Ebitda or 3) ₹946/share based on asset-based valuation, where assets are valued on the basis of recent transactions and in case of refining replacement cost based on Hindustan Petroleum Corp. Ltd’s upcoming Rajasthan refinery."
EV/Ebitda is a measure of valuing firms. EV refers to enterprise valuation, and Ebitda is earnings before interest, tax, depreciation and amortization, a measure of profitability.
Of course, that’s a very wide range for valuation, although it’s fair to conclude that the potential is high. News reports suggest bidding interest will be high. In fact, BPCL shares have risen 40% so far this year in anticipation of the stake sale.
“The optimism on the bid will keep investors engaged at least for the next few months until clarity emerges," said an analyst with a foreign broking firm on condition of anonymity.
While the valuation BPCL may fetch will unravel over the coming months, much will also depend on how the government plans to execute the sale process.
“We see multiple benefits for the government from separate and targeted divestment of BPCL’s holding in key subsidiaries, JVs and investments, which are either unrelated to core downstream businesses, such as Bharat Gas Resources Ltd (holding company of gas JVs) and Bharat PetroResources Ltd, or have a distinct geographical presence, such as NRL, or are standalone refining JVs such as Bharat Oman Refineries Ltd," said analysts at Kotak Institutional Equities in a report on 26 November.
The government can realize better value if BPCL sells these assets to other firms who are keen on expanding their presence in specific sectors such as gas, upstream or refining, added the Kotak report. This way, it can expect better valuations, compared to a composite value for all the company’s different parts.
And, finally, bidders will need assurance that the regime of free-market pricing for fuel stays. Last year, investors in state-owned oil firms got a shock when they were reportedly asked to sacrifice on marketing margins to help lower the cost of fuel in retail markets.