BPCL divestment deep dive: Equity valuation expected between Rs 700-900/share

Updated : December 13, 2019 03:36 PM IST

BPCL’s refining business is valued at 7.5x FY21 EV/EBITDA, in line with the valuation for Saudi Aramco’s stake in RIL’s refining and pet-chem asset

BPCL also holds a 12.5 percent stake in Petronet LNG, 22.5 percent in IGL, 2.5 percent in Oil India and 22.5 percent in Mahanagar Gas

The BPCL divestment was cleared by the cabinet on November 21 and it’s a huge step considering the mammoth size of the organisation, assets, national importance, etc.

The divestment plan says that stake sale will be done excluding the Numaligarh refinery where BPCL holds a 61.65 percent stake and is valued at Rs 6,100 crore. There have been reports suggesting that Oil India is keen on buying this stake since it owns 26 percent in the refinery while the rest is owned by Assam Government.

Finance Minister Nirmala Sitharaman also indicated that the government would conclude the stake sale by March 2020 and sources have also told CNBC-TV18 that the government will be starting roadshows for BPCL strategic sale soon.

Now, the question is what will be the valuation of the company. The stock has already surged 37 percent YTD. The majority of the gains came in the last two months when the noise around the BPCL divestment picked up.

The stock in terms of valuations is not cheap anymore. Its trading at 11.8X FY21 EPS which is higher than historic averages and also higher than the other OMCs (oil marketing companies).

Let us now look at how big BPCL actually is to get a clearer picture.

Refining Asset

BPCL’s refining capacity stands at 27.5mmtpa (operates at over 30mmt consistently) and has a 50 percent stake in 7.8mmtpa JV Bina refinery and a 61.6 percent stake in 3mmtpa Numaliagarh Refinery. Thus BPCL’s refining capacity is higher than that of Essar Oil but its refineries are less complex.

BPCL’s refining business is valued at 7.5x FY21 EV/EBITDA, in line with the valuation for Saudi Aramco’s stake in RIL’s refining and pet-chem asset. This would value the refining business Rs 1.02 lakh crore.

Marketing Asset

OMC’s have a strong and sustainable moat in the fuel marketing business and own ~90 percent of retail outlet with private players owning the balance. IOCL has the highest market share at 38 percent, followed by BPCL at 20 percent and HPCL at 18 percent. The rest is owned by private players.

BP Plc recently agreed to buy a 49 percent stake at Rs70bn (US$1bn) in the marketing assets of a private player with 1,400 petrol stations and who supplies aviation fuel at over 30 airports. BPCL has 14,802 petrol stations. BPCL’s marketing business valued at 11x FY21 EV/EBITDA could take its value around Rs 1.1 lakh crore.

Reserves

BPCL also has a 10 percent stake in 60 tcf of gas discoveries and Area 1 LNG project in Mozambique. BPCL also has 214 mmboe 2P reserves in Vankor and Tass producing assets in Russia. The Mozambique asset is valued around Rs 14,000 crore (valued on the same basis as Total SA has valued Anadarko’s 26.5 percent stake in that asset) and the Russia asset is valued at Rs 7,200 crore.

Investments

BPCL holds a 12.5 percent stake in Petronet LNG, 22.5 percent in IGL, 2.5 percent in Oil India and 22.5 percent in Mahanagar Gas. The company also holds stake in unlisted companies like Sabarmati Gas and CUGL (49.49% and 25% respectively).

The pricing picture

This continues to remain the big question. Analysts believe there is more upside at current levels if the company is privatised. They calculate that BPCL is valued somewhere between Rs 700-900/share considering its asset size.

It would be safe to say that privatisation leads to value creation but till the time there is further clarity, BPCL will continue to be in focus and the stock price should be quite volatile.