Gandhar Oil Refinery IPO’s giddy success exposes the sloppiness holding up BPCL disinvestment

The key driver is that the per capita consumption of petrochemical segments within India is significantly lower, compared to that in developed economies. Potential applications from medicines, textiles, cosmetics and construction chemicals are enormous.  

Indian Oil chairman SM Vaidya has estimated that petrochemical production in the country, which accounts for nearly 14% and 8% of the global demand for oil and gas, respectively, will increase to about 30% soon. 

At the same time, S&P notes that the chemicals game is cyclical. Which means not everyone can play it. Not at least unless one has deep pockets. This should have meant easy pickings for India’s cash rich national oil and gas companies, especially Bharat Petroleum Corporation Ltd (BPCL), and offered a bright picture for its disinvestment. But the market does not think so. Since March, the scrip has not budged at all.  

The primary reasons are obvious. BPCL has deep pockets with a capex budget of Rs10,000 crore, but its strategy makes little sense. The company prides itself as India’s third-largest oil refining company with a share of 13.90% of the market, but beyond that has little to offer.  

The company is not the market leader in any of its business lines--refineries, LPG, retail, city gas, or lubricants. BPCL is an all-weather friend, producing a little of everything. So its foray into the petrochemicals business from its Kochi refinery, the largest among the state-run ones, at 15.5 MMTPA, with an aggregate investment of Rs6,500 crore, has also not stirred the investors.  

Both Indian Oil and ONGC subsidiary, Hindustan Petroleum Corporation Ltd (HPCL), have a clearer line of sight to this business; Reliance Industries Ltd is, of course, way above the league.  

A big reason for the ho-hum attitude of the market towards BPCL has got to do with its lack of effort to gain a leadership role. The company and its owner, the government of India, do not seem to have any clear idea where to slot it.   

Evidence of this is how in recent years the company has also got into the upstream exploration business. In 2016, BPCL picked up stakes in two Russian oil fields, moving on to the UAE, and is now into six countries. Since it has little money to offer here, the current year’s exploration budget is just Rs2,150 crore. These are obviously costs that drag on the company’s financials.  

These investments were made simply because the government of India wanted the refinery company to meet the bill for investments abroad. But having made those, the company has to spare some of its management space for them. These diversions deflect from what the core business of the company should be. One of BPCL’s strategic aim is to generate 2.8 MMT of petrochemical products by 2027, mainly utilising the Kochi refinery to “create synergy for diversification into petrochemical products". 

Yet with these product and investment mix, it seems impossible how the company will create any more additional value for the government. Over the past few years both the petroleum and natural gas ministry and the disinvestment ministry have cited adverse market conditions as reasons for why the BPCL disinvestment has been put off. It will be striking if the current favourable phase for petrochemicals also seems a dampener for the fortunes of the company.  

No wonder the markets have cheered the offer for Gandhar Oil, a far smaller entity than BPCL in a capex-heavy business, but has no word of cheer for the latter.