BPCL Stock Analysis

Divestment Options of BPCL

Introduction

In this article, we are going to do BPCL stock analysis including company overview, key financials and divestment options of BPCL. BPCL is a leading name in the government’s divestment programme to maximize the revenue.

BPCL Stock Analysis

Company Overview

• Bharat Petroleum Corporation Limited (BPCL) is a government-owned company with 53.29% stake of government.
• In 2017, BPCL has received Maharatna status, putting it in the category of PSU entities in India with the largest market capitalization and consistently high profits.
• It is India’s 6th largest company in terms of revenue, with a revenue of Rs.3.376 Lakh Crore for FY2019. Also, it is 2nd largest oil marketing company (OMC) after Indian Oil Corporation Ltd. (IOCL).
• Domestic market share of BPCL by value is around 21% in FY2019, whereas that of IOCL is around 40-45%.

Business Verticals of BPCL

• Bharat Petroleum Corporation Ltd. (BPCL) is mainly engaged in the business of refining of crude oil and marketing of petroleum products. BPCL is having a diversified product offering and presence across value chain.
• The company’s business is divided in seven key Strategic Business Units like Refinery, Retail, LPG, Industrial/Commercial, Aviation, Lubricants and Gas.

Key Financials of BPCL Stock

• With a heavy capital investments in refinery, pipeline infrastructure and oil terminals, retail outlets, stock is giving a return-on-capital-employed (ROCE) of 18.92, which is very positive. ROCE number of BPCL is greater than its peers, showing the comparatively higher return per unit of capital employed. ROE is 19.86, which is also very positive.
• D/E ratio is 0.78, while interest coverage ratio is 6.72. Both the numbers are very good. It shows the ability of the company to repay its interest payments regularly with generation of a positive net cash flow.
• Also, the Stock is providing a good dividend yield of 3.34%.
• Current PE ratio of BPCL is 18.9 as compared with its historical average PE ratios around 10-13. It shows BPCL is currently trading at almost 40% premium valuation when compared with its historical PE ratio.

Divestment of BPCL

Government is looking to divest its 53.29% stake in BPCL either to IOCL or even private players. This divestment will help maximize revenue for the government.

Divestment Option 1 : Merger of BPCL with IOCL

• Merger of BPCL with IOCL will create an energy giant with disproportionate share in the Indian energy market across refining, fuel retailing and City Gas Distribution players.
• This will be an easiest way out for the government to raise money to meet part of their divestment target of Rs.1 Trillion.
• Synergy in refining and product sourcing : In terms of synergy, there is lot of overlap in fuel retailing business and major savings can be achieved by way of coordinated marketing plans.
• Funding the acquisition not a concern : Funding the BPCL stake by IOCL will not be a major concern, as IOCL’s net debt to equity stands comfortable at 0.55x.
• In addition, BPCL has a much better earnings profile with ROEs of >20% vis-a-vis 15% for IOCL.

Divestment Option 2 : BPCL Stake Sale to Private/ Foreign Players

• BPCL stake sale to private/foreign players will help unlock the real value of the company and help realize government strategy to bring competition in fuel retailing and break the dominance of the OMCs, which has over 90% market share.
• Post sale, share of private/foreign players in fuel retailing will increase to around 33% from current 10%.
• BPCL’s well-laid pipeline infrastructure and oil terminals across India can be used by the entrant to significantly scale up operations in a competitive landscape.

Conclusion

• Divestment to IOCL will create a big monopoly of combined entity (IOCL+BPCL). Although it is unlikely to alter market dynamics in the near term.
• The divestment to IOCL is the easy way out, but the real price discovery of BPCL stock will happen with stake sale to foreign/private players and unlock the real value.