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BPCL: Disinvestment trigger

May 25, 2002

BPCL: Current Status
CMP Rs 282
No. of shares nos 300
Net sales* Rs m 354,591
EBITDA* Rs m 16,132
PAT* Rs m 6,549
OPM % 4.5%
NPM % 1.8%
EPS Rs 21.8
BVPS Rs 136
Mkt cap Rs m 84,450
Enterprise value Rs m 119,297
P/E x 12.9
Price/book value x 2.1
Mkt cap / sales x 0.2
EV / EBITDA x 7.4
* annualised figs.    
The Bharat Petroleum Corporation Ltd. scrip has sky-rocketed on the bourses rising by 86% over the past year while a basket of oil stocks are higher by 72%. Much of this increase has occurred in the last three months due to positive news flow in the sector. Indo-Burmah Petroleum, the first divestment of FY02, has got the market's pulse racing.

Investor sentiment towards the oil sector has improved significantly in 2002, which primarily is due to the government-owned status of companies. As a corollary, much of the improved sentiment is really the upshot of increased market confidence in the disinvestment programme. An indicator of government seriousness towards the programme can be gauged from the sale of Indian Petrochemicals Corporation Ltd. (IPCL) at the height of possible military exercise on the Northwestern border. Through this entire period of cross-border military rhetoric, the intensity of announcements by the Department of Disinvestment (DoD) has not flinched. Therefore, disinvestment has been amongst the only trigger to keep investor interest alive.

With completion of IBP sale, next on the list from the petroleum sector are the much awaited heavy weights, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). The ingredients look right for aggressive bidding. Reportedly, several international majors are waiting in the wings to establish a foothold in India and acquisitions is likely to be high on entry strategy. Therefore, more number of serious bidders are likely to participate. IBP and IPCL attracted sizable premiums and with stakes higher on HPCL and BPCL, valuations could be at equal, if not higher, premiums. The disinvestment momentum could build up the tempo for financial bids.

Sum of part valuation*
Sum of part valuation*
    BPCL
Refining assets MMT 8.0
Replacement cost / MT Rs 5,000
Value of refining assets Rs m 40,000
Marketing assets    
No. of retail outlets nos. 4,562
Replacement cost / outlet Rs m 8
Value of retail outlets Rs m 36,496
Product tankage MKl 2.9
Replacement cost / Kl Rs 4,500
Value of product tankages Rs m 13,230
LPG Bottling plant MMT 1.4
Replacement cost / MT Rs 7,330
Value of bottling plants Rs m 10,262
No. of ATF stations nos. 19
Replacement cost / station Rs m 100
Value of ATF stations Rs m 1,900
Value of marketing assets Rs m 61,888
Replacement cost of assets Rs m 101,888
Add    
Investments** Rs m 10,341
Total asset value Rs m 112,229
Less    
Net debt Rs m 37,054
Net asset value Rs m 75,175
No. of shares m 300
NAV / per share Rs 251
* All figs. are estimates
** Investments in KRL, NRL and others

In February '02, at time of IBP disinvestment, the DoD indicated that process of disinvestment in the concerned companies would in all likelihood begin within three months of APM dismantling. Petroleum product prices were decontrolled at start of the fiscal. Therefore, one can expect the process to start before June end. As per reports, advisors to disinvestment were to be appointed by May end. Having said that, certain issues need to be addressed before disinvestment. But we do not believe they are likely to stall the process.

Among the concerns are timing of divestment - which company should be divested first, if sold separately? As per reports, first on the blocks is likely to be BPCL due to higher valuations commanded by the company compared to its peer. Owned retail assets of BPCL are an estimated 65%, as compared to 50% for HPCL and 30% for IOC. Further, percentage of owned retail assets is much higher in urban centres. Therefore, company has a higher buffer against predators in a competitive environment. Management of BPCL is considered to be more marketing savvy -- company has launched several initiatives including Petro Bonus & Smart Fleet pre-paid cards to ensure customer loyalty. BPCL also has a favourable marketing / refining capacity ratio, which is important considering the wafer thin refining margins.

Both BPCL and HPCL have undertaken new refining projects. BPCL has planned a 6 m metric tonne (MMT) refinery at Bina, Madhya Pradesh. Consequently, the status on project completion needs to be addressed. Most importantly, financial bids are likely to be invited only after the regulatory bills has been passed in parliament. The bill will be debated in the monsoon session. However, we believe this should not delay appointment of advisors and other ground work -- setting the stage ready for post passage of regulatory bill. We reckon the sale to be completed by third quarter of FY03.

Considering the imminent sale of stake. We undertook a valuation exercise to get some indication of price bids. On conservative basis, we believe the fair value of BPCL share to be Rs 251. Assuming a 25% premium to fair value the price works out to Rs 313. However, assigning a similar value to retail outlets based on Royal Dutch Shell's bid for IBP (Rs 13.4m/outlet), the price rises to Rs 333/ share and with a premium of 25% the share price stands at Rs 416. On EV/EBITDA of 6.5x (based on 9mFY02 annualised EBITDA), the share price works out to Rs 226. The Government also needs to clarify the disinvestment process in BPCL. Currently, the Government holds 66.2% in BPCL while 51% in HPCL. Consequently, the Government could go in for a public issue prior to strategic sale -- similar to Nalco -- to bring down its stake to 51%. But in case of IPCL the Government holding 60% did not reduce its stake prior to sale. Based on our conservative valuation, we believe the market has already factored in any positive upside from disinvestment. However, on aggressive estimates, the break-even price on our FY03 earnings estimates trades at attractive valuations.

Case 1
Shareholding pattern*
Shares Outstanding 300.0
Government holding 120.6
Strategic buyer 78.0
Free float (33.8%) 101.4
Open offer (@20%) 60.0
* shares in m  
Arbitrage Opportunity?
  BPCL
buy back % of free float* 59.2%
Open offer price 313.0
CMP** 281.5
Premium to CMP 11.2%
Realisation from open offer 185.2
Break-even price (BEP) 235.8
FY03E EPS 26.0
P/E Ratio on BEP 9.1
*Assuming all non-strategic shareholders
tender in their shares   **Current market price
Case 1 - no IPO
Case 2
Shareholding pattern*
Shares Outstanding 300.0
Government holding 75.0
Strategic buyer 78.0
Free float (49%) 147.0
Open offer (@20%) 60.0
* shares in m  
Arbitrage Opportunity?
  BPCL
buy back % of free float* 40.8%
Open offer price 313.0
CMP** 281.5
Premium to CMP 11.2%
Realisation from open offer 127.8
Break-even price (BEP) 259.8
FY03E EPS 26.0
P/E Ratio on BEP 10.0
*Assuming all non-strategic shareholders
tender in their shares   **Current market price
Case 2 - IPO


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