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Energy: Refining assets undervalued? - Views on News from Equitymaster
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  • Sep 28, 2001

    Energy: Refining assets undervalued?

    As per the original administered pricing mechanism (APM) dismantling schedule the petroleum sector is to be completely deregulated by end of FY02. The Government has reiterated its resolve to stick to this timeline. Although, the markets are a bit skeptical about the Government meetings its target, they keenly wait in anticipation of deregulation.

    Markets await deregulation: Who's the fairest of them all?
    CMP* Rs 125.8 153.0 128.5 301.5
    No.of shares no. m 339.3 300.0 778.7 22.1
    Market Cap Rs bn 42.7 45.9 100.0 6.7
    Gross sales** Rs bn 485.7 459.3 1,183.9 86.2
    EPS** Rs 32.1 27.3 34.9 24.5
    Book value** Rs 191.1 136.0 203.0 166.7
    P/E ratio x 3.9 5.6 3.7 12.3
    CMP/Book value x 0.7 1.1 0.6 1.8
    Market Cap/Sales x 0.09 0.10 0.08 0.08
    EV/EBITDA x 4.6 4.7 5.9 7.8
    *Current market price ** FY01 numbers
    Enterprise value (EV) Rs bn 76.3 80.7 276.6 9.7
    No. of retail outlets Nos. 4,600 4,562 7,549 1,539
    EV/Retail outlet* Rs m - - - 6.3
    EV of Mktg assets Rs bn 28.9 28.7 47.4 -
    EV of Refining assets Rs bn 47.4 52.1 229.1 -
    Refining capacity MMTPA 13.0 8.0 35.6 -
    EV/tonne Rs 3,649.0 6,510.2 6,445.5 -
    *Based on IBP value assumed similar value for peer group

    The markets are bullish on the petroleum sector as free market pricing and transfer of oil pool account (OPA) to the general budget, post deregulation, is expected to reap significant benefits for petroleum-marketing companies. Also, with the Government dangling the divestment carrot markets are quick to lap up these stocks. However, based on the Government's track record it runs the risking of crying wolf all to often.

    Indo Burmah Petroleum (IBP) is scheduled to be the first petroleum asset divestiture by the Government, which is expected to be completed in the current fiscal. On the back of this news the scrip ran up significantly last year. The counter continues to trade at a premium to its bigger brothers in the market. Based on valuations, it seems, the market is betting on Bharat Petroleum Corp. (BPCL) to be a bigger beneficiary in the post deregulation era. This could be due to the company adopting visible measures to give competition a run for its money post deregulation.

    With the impending IBP disinvestment the scrip is trading in a range of what the market believes will be the most likely winning bid. Consequently, the market is factoring most of the benefits accruing from disinvestment, which has led to a higher asset price. The EV per retail outlet for IBP is Rs 6.3m.

    Assuming a similar asset price for the same asset class in case of the peer group we have arrived at a break up of the refining and marketing asset values. Assuming that the bourses have fairly valued marketing assets (IBP case) we arrive at the implicit value the market is according to refining assets. The EV/tonne of BPCL and Indian Oil Corp. (IOC) seems reasonable compared to the replacement cost of the asset class (refining). On the other hand, on EV/tonne basis, Hindustan Petroleum Corp. (HPCL) is valued at an estimated discount of 43.7% to its peers. According a similar value per tonne to HPCL's refining assets the estimated market price works out to Rs 234 with a multiple of 7.3x FY01 earnings.



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