Bharat Petroleum historic Dividend and Stake Sale: The Path Ahead
An market expert has opined that " Not much upside left in BPCL " and BPCL is not a disinvestment bet for him. This interview was carried in a prominent financial daily on 31st May 2021. His premise is based on lack of spike in market value of Bharat Petroleum despite historic dividend announcement and lack of interest expressed by corporate in its sale. In his view only companies interested in assets would end up buying Bharat Petroleum.
Recapitulating Bharat Petroleum announced a dividend payment of Rs 58 per share on 26th May 2021 along with its quarterly results. The much awaited dividend was on expected lines since it was sitting on cash reserves generated by sale of Numaligarh Refinery and inventory gains. Obviously privatisation bound Bharat Petroleum cannot be handed over with huge cash reserves. The government being the majority stake holder is the main beneficiary of this exercise. However it is subject to shareholders' approval which would be somewhere in August third week after the annual audit exercise which is mandatory for a government company. In the meanwhile the momentum generated in the share price has slumped. Already Bharat Petroleum share which hit a peak of Rs 488 on 27th May has flattened at Rs 483.95 on 11th June since there is no trigger for spike in price of share. The AGM expected to be held in August to ratify the dividend of Rs58/- per share is not in immediate future hence there is no incentive to stay invested in the stock. Market is notorious for factoring in the any value add including dividend payout and government needs to ensure that valuation continues to be high as worthy of a Navaratna company. The govt has lowered the disinvestment target from 2.1 lakhs crore to 1.75 lakh crore. The target largely hinges on sale of M/s Bharat Petroleum Corporation Ltd at a sale price of around 90000 crore against market valuation of Govt stake which is approx 50,000crore at current market value of share.
Let's look at the past of Bharat Petroleum. Bharat Petroleum was a purely private entity namely Burmah Shell under the patronage of British Govt which ruled India . Burmah Shell was nationalised and rechristened as Bharat Petroleum in 1976 by an act of parliament. It wore the PSU garb and became entitled to all the privileges and guarantees of Government Of India. This led to rapid growth with infrastructure development with land holdings obtained at low prices from Indian Railways and other govt bodies. With Modi Govt declaring their intention to concentrate on governance and not running business BPCL came up for sale. However the act under which it was nationalised had to be repealed before Bharat Petroleum could be offered for sale. The act was finally repealed in 2016 with other obsolete acts bundled together paving the way for privatisation. Ironically Bharat Petroleum though an attractive buy is not finding suitors amongst big corporate, Two US based funds and Vedanta resources are the only suitors short listed after EOI . Also BPCL share value at Rs483/- which is ridiculously low for a company offering 31 million tonne refining capacity and 25% share in fuel marketing. With Hindustan Petroleum slated to follow sale of Bharat Petroleum such low share valuation is worrisome trend for companies with substantial asset base and infrastructure.
Bharat Petroleum has substantial assets by way of real estate due to its pipelines , depots, refineries and prime office space. The assets valuation itself will probably equal to the sale value if sold at today's market price of shares. Apart from tangible assets such as real estate , Bharat Petroleum has intangible assets such as product brands MAK in Lubricants and Speed in petrol. They also have a huge data base of users of smartcard namely Petro Card and Fleet Card. Petro card is mainly designed as an offering for petrol consumers and Fleet card for diesel consumers. They are also in a large section of house hold as Bharat Gas their LPG offering. Their brand valuation has been consistently high. In 2020 Brand survey conducted by Economic Times Bharat Petroleum is at 5th spot in the most valuable Brand List. They also have a subsidiary namely Bharat Resources which has stake in oil fields .BPCL has three refineries namely at Mumbai,Kochi and Bina in Madhya Pradesh. Except Bina which was set up in partnership with Oman Oil other refineries are old refineries and the asset value is a depreciated value in its books though market value will remain high. It also has 15078 petrol pumps and 6004 LPG distributors. It is the second largest oil marketing company in India by way of market share with rural reach.
Bharat Petro Resources its wholly owned subsidiary has participating interest in 17 upstream exploration blocks- seven in India, six in Brazil and one each in Mozambique,Indonesia,Australia and East Timor. about 88% of its total 24,375sq km E&P area is in off shore. Vedanta which is in upstream will get tremendous advantage by the acquisition as it will get access to both upstream and downstream assets of Bharat Petroleum Corporation Ltd. Obviously it cannot expect a bounty by paying pittance and should be ready to pay a premium for the acquisition.
Hindustan Petroleum another oil PSU of similar valuation was sold to Oil and Natural Gas Corporation ( ONGC) in Jan 2018 for Rs36,915 crore at a share price of Rs 473.97 for 77.88 crore shares constituting 51.11 percent of Government holding. If the same yard stick is applied Bharat Petroleum will fetch maximum of 50000 crore which is nowhere near its enterprise value which is estimated above 90000 crore. HPCL was sold at market value since it was being sold to another PSU controlled by Govt of India hence valuation did not matter. However ,BPCL is slated for privatisation hence the parameter needs to be different so that it is not sold cheap. It has to be enterprise value factoring in all assets tangible and intangible so that government gets good value for what is undoubtedly Jewel in the PSU crown. Taking enterprise value & brand valuation the assessed value would be above Rs.800 per share. The premium associated with sale of majority stake should fetch bidding around Rs1200 per share. However time for Government to aggressively market the company slated for sale to ensure valuation peaks. Any failure to get premium pricing will affect the sale of Hindustan Petroleum and other PSUs earmarked for disinvestment.
Since AGM of Bharat Petroleum is expected in third week of August as disclosed by Director finance likely action can be expected thereafter. With most parts of country under lockdown investors need to stay invested for any anticipated returns which hinges on privatisation. Meanwhile the three suitors have to do their due diligence to make financial offer. The excitement associated with privatisation of PSUs is already waning due to delay in execution mainly due to lockdown in various states and ban on international travel. The announced dividend also appears to be in the realm of future possibility and not present. If these factors are discarded the BPCL continues to be an excellent disinvestment bet and Government should go ahead with it. It should also allow FDI into petroleum sector and allow foreign companies to bid giving them majority stake. If Lakshmi Vilas Bank can become part of DBS Singapore why should there be hesitation in Bharat Petroleum reverting back to Shell or any other foreign company. Even after BPCL sale PSUs will continue to hold nearly 70% of the market through Indian Oil & Hindustan Petroleum Corporation Ltd. Hence FDI should be allowed so that the actual value of PSUs being privatised can be realised.
About the writer :
C.H.Raj is an oil industry expert having superannuated at senior management level from M/s Bharat Petroleum Corporation Ltd after 30 years of service in management cadre in 2011. He continued offering his expertise to petroleum sector by being consultant and trainer with Indian Oil, Total Oil, Hindustan Petroleum and Bharat Petroleum for the next 10 years. He is also faculty in management and a freelance writer . He is based out of Bangalore .
He can be contacted as under :
E mail : rajchbpcl@gmail.com
rajch5tr@gmail.com
Mobile : 9900334952
CEO @ SSR Enterprises | Consultant & Trainer in Petroleum
3y100% FDI in PSU oil marketing companies approved by Govt of India. Capping it at 49% had dampened the enthusiasm of foreign companies as they would be deprived of majority control. This addresses the issue of majority stake being sold in BPCL.
CEO @ SSR Enterprises | Consultant & Trainer in Petroleum
3yBharat Petroleum holds stake of 12.5% in PetroNet LNG. It also holds 22.5 % in Indraprastha Gas and 2.47 % in Oil India .The total value of such cross holding has to be factored in any sale of majority stake in BPCL. In case BPCL chooses to sell its stake in joint ventures and other entities it will transfer the proceeds by way of special dividends to shareholders including Govt of India which holds majority shareholding. Either way It should be win win situation for Bharat Petroleum shareholders.
Founder at Safety Solutions
3yVery good article by Raj. BPCL has MNC like work culture and we had opportunity to learn a lot. Although we are not on the scene anymore but our emotions are attached. BPCL has undergone several restructuring & reorganizing exercises in the past. Company has made excellent performance in financial & non-financial areas all these years. Hence, existing staff will have no difficulty in working in tune with new management regime. In nut shell, for such an established company Govt. must expect returns much more than their in house valuation from prospective private sector company. Govt shouldn't hesitate to defer / postpone if it doesn't fetch desired returns.
Personal "Trans"formation Coach for Executives
3yCongratulations Raj for a thorough analysis of BPCL and the current disinvestment scenario. We have been hearing of all the policy "intents" to free the OMCs from all government control and truly make the industry a level playing field, right from the year 2000 CE. Not much has come out of it, has it? With all the talk about "autonomy" for OMCs to price their products, we know who calls the shots in day to day pricing. Else, why would the opposition parties criticise the government for price increase all the time? (with little or no comments from the opposition about many of the essentials controlled by pvt sector - going unnoticed by the opposition - I don't want to get into comparisions here). I firmly believe, succeeding governments have known, OMCs are the cash cows who can be milked consistently and I see no reason why any government would want to permanently lose control of such "resources". Even now with the EOI being shown only by 2 probable buyers, it is any body's guess where this disinvestment proposal is going. Add to that the current pandemic economy where the whole project is likely to be on the back burner for at least this fiscal, if not from the government side, the buyers may be reluctant to go ahead in view of the uncertainty. Finally, in the event of NDA alliance not coming to power in 2024 - you know the whole privatisation proposal may be shelved for ever. So much for all the protests within the company against privatisation (I for one, wonder how many of the protesting employees have their children working for PSUs / or want their children to work for PSUs as first preference and BPCL in particular! I may be wrong on this one). I only hope in the interest of the consumers the privatisation efforts go through and finally a true "free market economy" is established in the downstream petroleum industry. Or will it remain an "Utopian" dream?