PSU disinvestment: Minority shareholders to gain from privatisation, says BPCL

Privatisation more likely than stake sale to IOC: Press reports suggest government of India (GoI) is considering selling its entire stake in Bharat Petroleum Corp (BPCL) to Indian Oil Corp (IOC) or to a private player. Privatisation would realise a higher price, may help take politics out of auto fuel pricing, would ensure IOC’s ability to pay hefty dividend to GoI is not impaired, prevent further supply overhang in ONGC and may improve market sentiment as it would be seen as big bang reforms.

The NDA government in 2016 obtaining Parliament’s approval to privatise BPCL and expert committee set up in 2018 to suggest ways to increase competition in auto fuels suggests GoI may opt for privatisation. Minority shareholders would gain (open offer at transaction price) if BPCL is privatised. Reiterate ‘Buy’.

Privatisation of BPCL more advisable than stake sale to IOC: Privatising BPCL is advisable as privatisation through competitive bidding would realise a higher price. Privatisation would also increase private sector market share in auto fuels to ~35% and help take politics out of pricing.

Privatisation may improve the broader market sentiment while sale to IOC is likely to hit investor sentiment, especially in PSUs.

Stake sale to IOC would lead to: (1) further rise in IOC’s market share dominance in transportation fuels, which may discourage proposed private investment in these areas (BP Plc announced $1-bn investment for 49% stake in auto and aviation fuel marketing JV in Aug’19); (2) rise in IOC’s debt and impair its ability to pay hefty dividend to GoI, and (3) possibility of IOC selling its 7.8% stake in ONGC to part fund the acquisition, which may hurt ONGC’s share price and hurt GoI’s plans to raise funds by selling its stake in ONGC via ETF.

Legal hurdle to privatisation of BPCL cleared in 2016: GoI attempted to privatise HPCL (strategic sale) and BPCL (domestic and ADR issue) in 2003. It fell through due to Supreme Court’s ruling that privatisation can be done only after repealing or suitable modification of laws, under which Indian assets of Shell, Exxon and Chevron were nationalised. In 2016, these laws were repealed, effectively ensuring Parliament’s approval for BPCL’s privatisation.

GoI formed an expert committee to recommend ways to increase competition from private players in transportation fuel marketing in Oct’18. The committee submitted its report in April 2019 and stakeholders’ comments were invited in May’19 after the Lok Sabha poll results.

May be valued as much as `952/share in a privatisation; GoI may realise $14.25bn: In the event of privatisation through competitive bidding, BPCL may be valued at $26.7 bn (`952/share) and its stake sale may realise $14.25 bn if assets are valued based on recent transactions. Minority shareholders would gain on part of their holdings from open offer at the bid price by the successful bidder.