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IBP Co. Limited

 Issue Summary
  • Type
    		•  Offer for sale by the book-building route
  • Min. subscription
    		•  10 shares
  • Size
    		•  3.6 bn (based on floor price)
  • Lead Managers
    		•  Kotak Mahindra Capital Company Ltd., ICICI Securities Ltd.
  • Floor Price
    		•  Rs 620
  • Listing
    		•  BSE, NSE, Calcutta, Ahmedabad, Delhi, Gauhati and Madras Stock Exchanges
  • Face value
    		•  Rs 10 per share
  • Promoters
    		•  Indian Oil Corporation Ltd.
  • Shares on offer
    		• 5.76 million
  • Promoters post
        issue holding
    		•  No change
  • Issue Opens
    		•  February 23, 2004
    		  
  • Issue Closes
    		• March 1, 2004
    		  

     Issue structure

     Background
     
  •  
    		•

    Indo-Burma Petroleum Company Limited (IBP), earlier a pure GOI entity, is now a 53.6% subsidiary of India's largest marketing and refining major, the Indian Oil Corporation. Although IOC controls the company, it is indirectly a GOI company as the former is a state controlled company. IBP is one of the major petroleum marketing companies with a diverse portfolio ranging from transportation fuels like motor spirit (MS), high-speed diesel (HSD) to lubricants, LPG and naphtha. IBP has a wide network base spanning across the length and breadth of the country with 2,524 retail outlets selling petroleum products, 378 Superior kerosene Oil (SKO) and Light Diesel Oil (LDO) and 69 LPG distributorships. It also has a dominant presence in industrial explosives business with an 18% market share in that spectrum along with its cryogenic business.

     
  •  
    		• Business
     

    IBP is primarily a petroleum marketing company with a portfolio of a number of petroleum products ranging from transportation fuel, such as motor spirit and high speed diesel, to lubricants, LPG and naphtha. The company derives almost 99% of its revenues from the petroleum products with the balance being contributed by the explosives and cryogenics businesses. IBP has a market share of 7.3% in motor spirit business and 7.2% in case of high- speed diesel. The table below gives an idea about the break up of the revenues of the company along with the petroleum products.
    Business segments
      FY03 9mFY04
    (Rs m) Size % Size %
    Petroleum Products 86,375 98.7% 74,916 99.0%
    Explosives 969 1.1% 672 0.9%
    Cryogenics 187 0.2% 117 0.2%
    Total 87,531 100.0% 75,705 100.0%
    Petroleum Products
      FY03 9mFY04
    (Rs m) Size % Size %
    MS 21,910 25.4% 20,651 27.6%
    HSD 55,583 64.4% 48,233 64.4%
    SKO 5,775 6.7% 4,113 5.5%
    Lubricants 1,793 2.1% 1,274 1.7%
    Others* 1,314 1.5% 645 0.9%
    Total 86,375 100.0% 74,916 100.0%
    * Other products include CNG, furnace oil, light diesel oil and LPG

     
  		• Promoters
     

    IBP was an independent PSU until February 2002, post which IOC acquired 33.6% stake from the Government of India (GOI). IOC, as per the applicable laws and provisions, acquired another 20% in the company through an open offer to the public, thus gaining a majority stake of 53.6%. IOC is the world' 17th largest petroleum company and India's only Fortune 500 listed company. It has a presence across the petroleum sector, with 10 refineries accounting for a combined capacity of 49.3 million metric tonnes per annum (MMTPA) and cross-country crude and product pipelines with a combined capacity of 52.75 MMTPA. It has an international presence in the lubricants market and has also forayed into the Sri Lankan retail sector to push its petrol products.

     
  		• Sector
     

    The petroleum sector in India has undergone major changes over the past few years with the GOI dismantling the Administered Price Mechanism (APM) in 2002. The sector has historically witnessed growth rates in line with the GDP rate of the country. Over the last 15 years, the CAGR of petroleum products has been approximately 5.5% compared to a 5.9% GDP CAGR.

    The sector basically can be divided into two spectrums: upstream, i.e., exploration and production and downstream, i .e., refining and marketing. Over the years, Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. (OIL) have dominated the upstream activities with ONGC accounting for 80% of the domestic crude supply. The downstream players are IOC, BPCL, HPCL, which are into refining as well as marketing of petroleum products along with IBP (a pure marketing company) and Reliance Industries (which until recently was not allowed to foray into the marketing segment). Internationally, oil majors have presence in each and every segment of the petroleum sector. In order to avail of the benefits of synergies, the Indian scenario has witnessed major consolidations and acquisitions in the recent past.

      Refining capacity
      Capacity MMTPA
      IOC* 49.3
      HPCL 13
      BPCL* 20
      MRPL 9.69
      RIL 33
      *IOC owns 7 refineries and has 3 refineries under its management control
      *BPCL refining capacity includes KRL and NRL

    Until recently, the petroleum sector has been dominated by the public sector undertakings. Now, with the recent announcements by the GOI to allow 100% foreign direct investment through the automatic route and private participation, the dynamics are likely to change, at least on the marketing front. Currently, India is a surplus producer of refinery products and therefore, foreign participation is less likely to come up in the refining business.

     Reasons to apply

  • Rural development and automobile segment growth:  The GOI plans to link villages through a network of roadways in its Pradhan Mantri Sadak Yojana. Further, the growth in the industrial activity coupled with good agricultural produce shall have a trickle down effect on the petroleum sector, thereby increasing the volumes of consumption. The recent surge in automobile sales is expected to be sustained in the foreseeable future. All this augurs well for the petroleum sector. Thus IBP, which is now focusing on expanding its retail network in the rural segment, is likely to gain.

     
  		•

    Synergies with IOC:  IBP, which does not have its own refining capacity, benefits from IOC's capacities and a major chunk of its products (88%) constitute petroleum products from IOC. Further, IBP has preferred access to IOC's infrastructure. IBP shall also benefit from the training and expertise of IOC along with the high bargaining power of the parent company. It shares storage and handling capacities with IOC thereby saving on costs substantially.

     
  		•

    Uptrend likely to continue:  The demand for petroleum products has increased and is likely to remain so in the foreseeable future with industrial activity picking up. Further, factors such as increase in petrol prices due to OPEC cutting down on production and the prices of fuel in Indian context not increasing in the short-term due to political reasons are likely to have an effect on the margins. However, post-elections, prices are likely to rise, thereby providing some cushion to the oil majors. Also, the reduction of subsidies on LPG and SKO by the GOI, shall lead to higher prices of these products by the oil majors in the future, especially post-elections.

     
  		•

    Probable candidate for merger:  With the entry of private integrated players and ONGC into the retail foray, it makes business sense for IOC to merge IBP with itself so as to further gain control in the day to day activities and to increase its reach across the length and breadth of the country. IOC shall benefit from the rural focus of IBP and also with its upstream activities, shall be in a better position to control the pricing of the products. Thus, IBP, which is a pure marketing company, shall be better valued in case of the merger.

     Reasons not to apply

  • Low bargaining power vis-à-vis suppliers:  IBP does not have its own refining capacity and as such is largely dependent on IOC for its products. Nearly 88% of the products sold by IBP are sourced from IOC. The company also has in place contracts with other oil marketing companies for petroleum products, which shall expire by the end of FY04. The company thus has no presence in the upstream segment, which is a big negative vis-à-vis main competitors like BPCL and HPCL. These companies already have a vast refining capacity and are now foraying into the upstream segment of exploration and production.

     
  		•

    Low bargaining power vis-à-vis consumers:  Even though the Administered Price Mechanism (APM) has been dismantled, the prices of petrol and diesel are decided every fortnight by the oil PSUs. Thus IBP does not have any independent power in deciding the prices for its fuel, which is the same for other PSUs as well. However, now that the private sector has been permitted to foray into the retail segment, it could be that these private players, with deep pockets, may adopt a penetrative pricing strategy to take away some market share.

     
  		•

    Increase in competition:  With the GOI allowing 100% FDI and private participation in the retail segment, and with the growing auto sector, more players are likely to compete in the industry. Private participants such as Reliance and Essar Oil do have their own refinery capacities and also would not be liable to share the subsidy burden as compared to other PSUs like IBP. Oil major ONGC is also planning to foray into the retail segment along with its refining subsidiary MRPL. Reliance, which plans to set up 600 retail outlets by the end of this year has its own refining base at Jamnagar with a capacity of 33 mmtpa.

     
  		•

    Low market share and reach:  IBP, vis-à-vis its competitors, has a dismal market share. The company has far lower reach as compared to its cousins BPCL and HPCL. Looking at the table below, it is quiet evident that IBP has a lot of catching up to do in terms of reach and salability.

      Oil Marketing Cos. (%) market share
      IOC 44.5
      BPCL 19.1
      HPCL 17.5
      IBP 3.6
      Minor PSUs 1.9
      Pvt Players 13.4
      Total 100.0
        Market Share in Transportation Fuel
      Oil Marketing Cos. MS (%) HSD (%)
      IOC 36.3 47.7
      BPCL 31.6 24.1
      HPCL 24.7 20.6
      IBP 7.3 7.2

     Financial Performance

     Shareholding

     Comparative valuations and comments

  • IBP Ltd. is trading at a price to book value multiple of 2.7x its 9mFY04 estimates. Its competitors although trading in the same range, should get higher valuations as compared to IBP given the fact that HPCL and BPCL have a more attractive business model, given their refining capacities and also their nationwide reach. HPCL and BPCL have 4,729 and 4,562 retail outlets as compared to 2,524 retail outlets of IBP. It has to be understood that given the dynamics of the sector, it is the volumes that shall drive growth in the future and HPCL and BPCL are in a better position vis-à-vis IBP to exploit the circumstances.

  • However, over the longer term, it is likely that IOC merges IBP with itself. Then the dynamics of the overall entity changes. But until then, on a standalone basis, there are other better opportunities.

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