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Energy: Activity heats up - Views on News from Equitymaster
 
 
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  • Mar 18, 2002

    Energy: Activity heats up

    Last week activity on the oil counters heated up with media reports of Bharat Petroleum Corporation (BPCL) planning to merge with its subsidiary, Kochi Refineries Ltd. (KRL). BPCL has clarified that only informal talks have been held between the two companies and there is no formal proposal before the boards.

    Merged entity performance
    (Rs m) FY01 9mFY02
    Net sales 530,687 309,958
    Other Income 4,098 1,732
    Expenditure 511,315 295,730
    Operating Profit (EBDIT) 19,372 14,229
    Operating Profit Margin (%) 3.7% 4.6%
    Interest 3,655 3,160
    Depreciation 7,660 4,020
    Profit before Tax 12,156 8,781
    Extraordinary items - (578)
    Tax 3,015 3,010
    Profit after Tax/(Loss) 9,141 5,193
    Net profit margin (%) 1.7% 1.7%
    No. of Shares 334.6 334.6
    Diluted earnings per share* 27.3 20.7
    P/E Ratio   20.6
    *annualised ** merger ratio 4:1

    Nevertheless, the KRL stock was frozen on the upper circuit (20%) for much of the day, as investors' believed the merger ratio is likely to be favourable for KRL shareholders. There is significant disparity in merger ratio based on last traded price and book value. Historically, while petroleum stocks have been undervalued, the recent disinvestments and deregulation in the industry has unlocked value in BPCL and HPCL. But pure refinery companies have not witnessed a similar rise leading to the wide disparity in valuations.

    The financial story
        BPCL KRL
    CMP Rs 319.5 43.8
    Sales Rs m 354,590.7 58,686.7
    EBITDA Rs m 16,132.0 2,839.3
    PAT Rs m 6,356.0 568.3
    OPM % 4.5% 4.8%
    NPM % 1.8% 1.0%
    EPS Rs 21.2 4.1
    BVPS Rs 136.0 98.5
    Shares o/s Nos 300.0 138.5
    Mkt. Cap Rs m 95,850.0 6,058.1
    EV Rs bn 130.7 14.7
    P/E x 15.1 10.7
    CMP/BVPS x 2.3 0.4
    EV/EBITDA x 8.1 5.2
    RoNW % 20.1% 8.0%
    RoA % 6.3% 2.1%

    On current market price basis the merger ratio stands at 7 shares of KRL for each BPCL share. While on book value basis the ratio works out to 1.4 shares of KRL for every BPCL share. With the wide range in the ratio, the net asset value (replacement cost) could give a better feel to the likely merger ratio. On net asset value basis the ratio is likely to be in the range of 3-4 shares of KRL for every BPCL share. Consequently, in the event of a merger, there is considerable upside to the KRL stock.

    A merger ratio less than 5 shares of KRL for every BPCL share is not likely to be accretive to the earnings of the merged entity. BPCL earned Rs 21.2 per share on an annualised basis for 9 months ended December '01. Merger of the two companies is likely to make the bidding procedure simpler on divestment. BPCL holds 55% of KRL and 63% in the 3 m tonne Numaligarh Refinery Ltd.

     

     

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