Sep 17, 2003|
PSU refineries: Missing the real picture
The Supreme Court (SC) verdict regarding the disinvestment process has dealt a severe blow to the stock market. While we would not like to debate upon the validity of the verdict, we would like to concentrate more on the fundamentals of the two companies, i.e. BPCL and HPCL.
What we are trying to ask is that by laying too much emphasis on the disinvestment process, are we missing the bigger picture. HPCL and BPCL are two of the largest oil refining and marketing companies in the country with a pan India presence as far as retail outlets are concerned. They are also well placed to capture the strong demand (for petroleum products) that the Indian economy is likely to have in the long term. For instance, demand for petro products is estimated to grow between 4%-7% CAGR over the next 5 years. With over 4,800 petrol pumps each and a combined refining capacity of 21.5 MT, infrastructure is in place.
Apart from petro products, both these companies are entering oil exploration in an effort to become an integrated player in the energy sector. Both HPCL and BPCL are also focusing their efforts towards the lubricants market. Expansion of refining capacity is also on the anvil.
On the operational front, both companies have a lot of potential to improve efficiencies. BPCL has already approached the government in order to initiate a VRS exercise to pare its employee strength. HPCL is likely to follow suit. This will improve throughput per employee and align towards international averages in the long term.
These companies are already benefiting from energy sector deregulation. Refinery companies are allowed to source crude independently, thus ensuring costs savings on the raw material front (future contracts). Post APM, these companies are in a much better position to decide product prices and any adverse movement in crude prices internationally is less likely to impact profitability. That said, complete deregulation would take some time.
As far as valuations are concerned we find that the assets of both these companies have a value that far exceeds the value of the share price of the company.
Read PSU refineries: Asset rich
Read The pot of gold…
The articles we have done in the past illustrate this point well. The investor needs to decide for himself whether HPCL and BPCL should be looked upon as merely disinvestment candidates or whether it makes sense to look at the asset value of these companies (which still seem to indicate a significant upside) for investing in the same.
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