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Energy: IBP sale, valuations re-think

Feb 6, 2002

Yesterday's press conference by the Ministry of Disinvestment has shaken even the most enthusiastic supporter of the Government's disinvestment programme. Having called for financial bids, an announcement of the winning bidders was only logical. But the excitement seemed to stem from the belief that big ticket disinvestment is all talk. Having seen the process faltering, time and again, investors & others thought it wiser to ignore Government promises on this front. The Cabinet Committee on Disinvesments seems to have proved everyone wrong. The petroleum sector witnessed its first disinvestment. The Government sold 33.6% stake in Indo Burmah Petroleum (IBP) -- bringing its holding down to 26% -- to the winning bidder Indian Oil Corporation (IOC). A more impressive step by the Ministry has been to bar IOC from future disinvestments in the petroleum sector. This will increase private sector participation in the industry and is likely to facilitate a healthy competitive environment. Also, speculation of a crony disinvestment programme could be laid to rest, which could come up, as the Government is the largest shareholder in IOC.

In the press conference the Disinvestment minister indicated that petroleum sector privatisation is to continue. In three months, post dismantling of the administered pricing mechanism (APM) the privatisation process of oil behemoths, Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) is likely to commence. Having said that, the stakes were no less in bidding for IBP, especially for IOC considering the now imposed ban. Though, this raises the question, was IOC aware of the ban resulting in the company bidding significantly higher (Rs 5,587 m) than the closest competitor.

What the deal means for others
    HPCL BPCL IOC IBP
CMP* Rs 212 269 179 861
No.of shares no. m 339.3 300.0 778.7 22.1
Market Cap Rs bn 72.0 80.6 139.1 19.1
Net sales** Rs bn 400.2 378.1 1,167.4 84.4
EPS** Rs 17.8 27.0 26.2 42.7
Book value Rs 191.1 136.0 203.0 166.7
P/E ratio x 11.9 10.0 6.8 20.2
CMP/Book value x 1.1 2.0 0.9 5.2
Market Cap/Sales x 0.18 0.21 0.12 0.23
EV/EBITDA x 7.3 6.9 7.7 11.8
*Current market price ** 1HFY02 annualised numbers
Enterprise value (EV) Rs bn 105.7 115.5 315.7 22.1
No. of retail outlets Nos. 4,600 4,562 7,549 1,539
EV/Retail outlet* Rs m - - - 14.3
EV of Mktg assets Rs bn 66.0 65.4 108.2 -
EV of Refining assets Rs bn 39.7 50.1 207.5 -
Refining capacity MMTPA 13.0 8.0 35.6 -
EV/tonne Rs 3,054.5 6,256.4 5,836.0 -
*Based on IBP value assumed similar value for peer group

IOC bid Rs 11.5 bn for the Government's 33.5% stake. On the other hand, Royal Dutch Shell, the second highest bidder, as per reports, submitted a bid of Rs 6 bn. The bid price of IOC implies a per share price of Rs 1,551, which was 80% higher compared to yesterday's closing price of IBP on the NSE. Based on the bid price, the enterprise value (EV) of IBP per pump amounts to Rs 24.3 m. As per industry estimates, the value of a pump is approximately Rs 5-7 m. This does indicate a significant premium to replacement cost. Disinvestment of petroleum companies are likely to be on asset valuation method.

Assuming a similar replacement value for the marketing assets of HPCL and BPCL, the refining assets are free based on yesterday's closing prices. The study implies that an upside of 108% and 54% for the concerned scrips respectively is likely to remove the asset valuation anomaly. That said, markets are also likely to recognise that a premium to fair asset price has been offered by IOC, which could be due to management control, preempt competition and possible ban on future disinvestment participation.

The bid price of Royal Dutch Shell implies a per share price of Rs 800, which seems to be more in line with market expectations. Last Monday IBP scrip closed at Rs 718. Assuming yesterday's closing price of IBP to be a more fair valuation, the EV per pump amounts to Rs 14.3 m. Based on a similar value for marketing assets of industry peers, the refining assets of BPCL and IOC seem to be valued fairly. However, refining assets of HPCL are still at a discount. This could be due to market perception that HPCL is the laggard among the big three. Also, the company is in a spot over the MRPL deal, which could be fettering valuations.

IOC: Will it be the bigger fool story?  
  IOC RDS* Open Offer
No. of shares 22.1 22.1 22.1
Gov. stake sold 33.6% 33.6% 20.0%
Shares acquired 7.4 7.4 4.4
Acquisition price 11,537.0 5,950.0 6,871.3
Price/share 1,551.3 800.1 1,551.3
*Royal Dutch Shell ** Fig. in m

As per the SEBI guidelines, IOC is likely to make an open offer to the shareholders of IBP for an additional 20%. Retail and institutional investors togther hold 40.5% in the company. The open offer pricing will have to be similar to that paid to the Government. This is likely to cost IOC an additional Rs 6.8 bn. The acquisition results in IOC having an aggregate of 9,088 retail pumps.


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