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BPCL: Price of consolidation?

Feb 20, 2001

The downstream petroleum sector in India is expected to undergo forced consolidation as the industry is thrown open to competition. As per the original schedule the sector is to be completely deregulated from April 2002 with the dismantling of the administered pricing mechanism (APM).Currently, the Government controls marketing of transportation fuels but with deregulation, post 2002, private players will be permitted to enter this segment. Stand alone refineries would stand to lose as the bargaining power could most likely shift to companies with marketing infrastructure.

Consequently, on the basis of the Sengupta committee recommendation the Government has stated that Kochi Refineries Ltd (KRL) and Numaligarh Refineries Ltd (NRL) are be merged with Bharat Petroleum (BPCL) while Indian Oil (IOC) is to acquire Bongaigaon Refineries and Petrochemicals Ltd. (BRPL) and Chennai Petroleum Corporation Ltd. (CPCL).

The deals are slated to be completed by the beginning of FY02 but meeting this schedule seems unlikely. As per latest reports BPCL and IOC are interested in acquiring these companies at the current market price while the Government is keen to sell at book value. This is evident in the case of KRL whose book value is almost twice that of its market price.

    Combined Entity (CMP)Book value
   BPCL KRL# Share deal Cash deal Share deal
CMP* Rs 197 61 215.5 246.1 157.3
No.of shares no. m 300.0 137.8 342.5 300.0 413.80
Market Cap Rs bn 59.0 8.4 73.8 73.8 65.1
Sales*** Rs bn 444.6 72.3 516.9 516.9 516.9
EBITDA*** Rs bn 15.1 3.4 18.5 18.5 17.3
PAT*** Rs m 8,801.0 2,216.6 11,017.6 11,017.6 9,716.0
EPS Rs 29.3 16.1 32.2 36.7 23.5
P/E x 6.7 3.8 6.7 6.7 6.7
Mkt cap / sales x 0.13 0.12 0.14 0.14 0.13
Mkt cap / EBITDA x 3.9 2.5 4.0 4.0 3.8
BVPS** Rs 116.0 95.8 211.8 211.8 211.80
CMP/BVPS x 1.7 0.6 1.0 1.2 0.7
Refining capacity MMTPA 7.0 7.5 14.5 14.5 14.5
Mkt Cap/ tonne Rs 8,434.3 1,116.2 5,090.9 5,090.9 4,489.5
* Current market price, ** Book value per share, *** Annualised FY01E, # 3 - year average
At CMP 1BPCL = 3.2 KRL, At BV 1BPCL = 1.2 KRL

Should the acquisition be made by a share offer at CMP the shareholders of BPCL stand to gain marginally (9% upside). This is assuming BPCL is able to trade at 6.7x earnings (current valuations). KRL shareholders will stand to gain more with a potential upside of 17%.

However, if it is an all cash deal shareholders of BPCL stand to gain significantly with a potential upside of 24%. KRL shareholders will be paid the CMP of Rs 61.

The Government though is keen to sell KRL at book value as the divestment will fetch it a higher value of Rs 96 as compared to Rs 61. The cash deal would have a similar impact for BPCL shareholders as the earlier scenario. However, the price tag would increase by Rs 35 / share. A share deal at book value would destroy value for both the shareholders. Further, in case of a cash deal it is not known how BPCL would fund the acquisition. The raising of debt would negatively impact earnings.

We could see couple of negotiating rounds between the two parties. Most likely there could be a compromise on the price between the CMP and book value.

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