BPCL ratings: Reiterate ‘Sell’ amid adverse risk-reward balance

The recent outperformance of BPCL against other OMCs is pricing in upside from a potential open offer in lieu of control premium that maybe paid by a strategic buyer in a scenario of privatisation. Our reverse valuation also suggests that the market has already ascribed 10X EV/Ebitda to BPCL’s marketing business, at a premium to global M&A in the fuel retailing business, while ignoring differences with developed markets. Reiterate ‘Sell’ amid adverse risk-reward balance.

The recent sharp rally in BPCL stock and its outperformance over other OMCs is effectively pricing in upside to minority shareholders from a potential open offer, in our view, in lieu of a control premium that may be paid by a strategic buyer to acquire the government’s majority stake in BPCL.

Our reverse valuation exercise adjusted for value of investments, suggests that BPCL stock is now trading at 8.6X EV/Ebitda multiple based on standalone estimates for FY21, which implies a significant premium to HPCL stock at 6.6X EV/Ebitda and IOCL stock at 6.4X EV/Ebitda. BPCL’s valuation is also at a premium to ~7.5-8X EV/Ebitda multiples implied for the recent proposed sale of stake in downstream business by RIL to Saudi Aramco and the sale of majority stake in HPCL to ONGC by the government in January 2018.

Further, our reverse valuation exercise, assuming 6.5X EV/Ebitda multiple for BPCL’s refining and petchem segment, implies that the market has generously ascribed 10X EV/Ebitda to BPCL’s marketing business contribution, effectively pricing in potential uplift of marketing profitability under a new private player and long-term growth opportunity in the fuel retailing business.

We doubt if a strategic buyer will pay more than 6.5X to commodity Ebitda from refining and petchem segments, with global refining peers and integrated majors trading at median valuation of 5-6X CY2020 estimates. Our analysis of a few M&A transactions in developed markets suggests that the fuel marketing business has been valued at 6-8X Ebitda, along with significant contribution and/or opportunity for non-fuel retail sales and services.

Bharat Petroleum