Why privatization of BPCL will be a good thing for all stakeholders

Why privatization of BPCL will be a good thing for all stakeholders

The government has set a tall divestment target of ₹1.05 trillion for FY20. Needless to say, it would need to sell stakes in some of the large public sector companies to achieve the target.

Here, state-run oil marketing and refining company, Bharat Petroleum Corp. Ltd (BPCL), seems to be on the radar. Earlier this month, a Business Standard report said that the government is considering selling its entire stake worth over ₹40,000 crore in BPCL. Of course, like similar such deals in the recent past, the stake sale will most likely be to another government-owned entity, Indian Oil Corp. Ltd (IOC).

But there is a twist to this tale. CNBC-TV18 reported that the finance ministry has raised objections on the government’s stake sale to IOC, as it can create a monopoly in the oil marketing business (see chart). So will the government consider selling its stake to a private sector firm?

A moot question then is whether the privatization of BPCL would be a good thing for investors. “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 the government of India is not impaired and may improve market sentiment as it would be seen as big bang reforms," said analysts from ICICI Securities Ltd in a note to clients.

Besides, as analysts at Prabhudas Lilladher Pvt. Ltd point out, the real price discovery of BPCL will happen with a stake sale to foreign/private sector firms.

The government had earlier sold its stake in Hindustan Petroleum Corp. Ltd (HPCL) to Oil and Natural Gas Corp. Ltd at a roughly 18% premium to prevailing prices. Prabhudas Lilladher analysts believe the premium can be much higher in the case of privatization.

HPCL along with BPCL and IOC are commonly referred to as oil marketing companies.

Moreover, a merger with IOC will create an unusually large behemoth in the energy sector. According to ICICI Securities, BPCL’s stake sale to IOC would further raise the latter’s market share dominance in transportation fuels, which may discourage proposed private sector investment in these areas.

While investors closely watch how this story develops, the recent strength in gross refining margins is encouraging to say the least.

More recently, investors have taken note of the improved refining environment. BPCL and HPCL shares have risen 23% and 16%, respectively, in the past three weeks thanks to the improvement in gross refining margins.

Still, valuations are subdued, having corrected substantially since end- 2017. According to analysts at JM Financial Institutional Securities Ltd, “Valuations are not demanding vis-à-vis historical averages; the government of India (GoI) stake sale overhang remains."