• OUTLOOK ARENA
  • VIEWS ON NEWS
  • APRIL 4, 2001

Energy: Price of industry restructuring

The restructuring within the energy sector is complete. The road map was laid down by the Sengupta committee, which put forward the proposal of merging stand-alone refineries with their refining and marketing (R&M) counterparts.

Bharat Petroleum (BPCL) and Indian Oil (IOC) have completed their acquisition of stand alone refineries. BPCL has acquired Kochi refineries (KRL) and is in the process of completing the acquisition of Numaligarh Refineries (NRL). IOC on the other hand has completed the acquisition of both Chennai Petroleum (CPCL) and Bongaigaon Refinery and Petrochemicals (BRPL).

Cost of Consolidation
  KRLCPCLBRPL
No. of shares m 137.8 147.2 199.8
Government holding 55.0%52.5%74.5%
Shares acquiredm 75.8 77.3 148.8
Purchase price Rs 86.0 65.9 10.0
Acquisition costRs m 6,522.7 5,095.3 1,487.9
MP*Rs 56.6 36.1 8.3
Premium to MP 51.9%82.6%21.2%
Book ValueRs 95.8 78.3 30.9
* At time of announcement

Was the deal worth it…
  KRL*CPCL*BRPL*NRL*BPCLIOC
CapacityMMTPA 7.5 7.0 2.4 3.0 7.0 35.5
EVRs m 16,158 19,417 2,202 9,053 78,537 257,640
EV / tonneRs 2,154.4 2,773.8 917.6 3,017.5 11,219.6 7,257.5
* Based on the acquisition price by R&Ms

The EV (Enterprise Value) per tonne for stand-alone and refining & marketing (R&M) companies will differ as BPCL and IOC are better integrated along the value chain (have access to marketing infrastructure). The value of their marketing infrastructure is included in the EV, which leads to the disparity.

Although the acquisition price has been significantly higher than the market price, on an EV per tonne basis the deals look attractive for BPCL and IOC. As per industry estimates the cost of setting up 1 tonne of refining capacity is approximately Rs 5,500. This again is dependent on the complexity of the unit. A discount to this figure may indicate that the capacities are old and low on complexity.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407