Nov 6, 2002|
Divestment: Consensus finally?
If one of the leading business dailies is to be believed, then confusion over the divestment of HPCL and BPCL seems to have been sorted out. HPCL is to be divested through a strategic sale, while BPCL is to be divested through the market route.
In an informal meeting, post the cabinet meeting, ministers have apparently reached a consensus regarding divestment. However, we would urge investors not to jump at the news and wait for the divestment minister to make a statement in the parliament, which is likely to be made Monday. Many times in the past, news items reported have been found to be not-exactly correct. It would not be surprising if the Government comes out slightly different version of the outcome. More importantly, the timing sell-off continues to be uncertain.
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.
At the current market price of Rs 195, BPCL trades at a P/E multiple of 5x its 1HFY03 earnings. 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 per share. Assuming a 25% premium to the fair value, fair value works out to Rs 313 per share. 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 per share. On EV/EBITDA of 6.5x (based on 9mFY02 annualised EBITDA), the share price works out to Rs 226 per share.
HPCL, is quoting at a P/E multiple of 7x its 1HFY03 earnings. Going by conservative asset valuation norms, we have arrived at a price of Rs 330 per share for HPCL. However, we may see aggressive bidding aided by factors other than merely asset valuation.
Both the stocks have historically traded at a P/E band of 4x-6x. While the valuations have not improved considerably, there have been very fundamental improvements at a sector level. Post dismantling of the Administrative Price Mechanism (APM) regime, R&M (refinery and marketing) companies are allowed to revise product prices. With flexibility in market pricing, the R&M companies are comparatively better positioned to cushion adverse movements in refining margins. The existing R&M companies have established retail outlets in key consuming markets at low historical costs. Although new players will now enter the market, marketing rights will be contingent on minimum investment of Rs 20 bn. Further, they will not be permitted to encroach on the retail network of incumbents. This should give players like BPCL & HPCL a significant first-mover advantage. In FY02, the Government decannalised import of crude oil for public sector refineries and RBI permitted refineries to hedge crude oil and petroleum product prices. These measures are likely to result in better procurement prices and lower volatility in margins.
In the recent past, expectations of aggressive bidding and therefore, significant gains from open offer have tempted investors to rush into the stocks to make quick buck. However, investors have had to face disappointment to the governments handling of the situation. There is no guarantee this will not occur again. However, both HPCL and BPCL are quoting at attractive valuations purely based on fundamentals. Therefore, investing with a long-term view could also be an alternative. Read our research reports to help you make the decision.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407