Lack of clarity over Numaligarh refinery, investments key concerns for BPCL

The Bharat Petroleum Corporation (BPCL) stock scaled fresh heights on Thursday, after the Cabinet Committee on Economic Affairs approved the strategic disinvestment of the Centre’s entire stake in the fuel-retailing and -refining company. 

At first glance, investor euphoria in the counter seemed justified, given that divestment by the government would mean value unlocking and possibility of the company garnering higher valuations. However, that may not be the case, as some experts have pointed out.

Amid the euphoria, analysts trying to assess the value unlocking potential and, consequently, the upside after the recently concluded oil and gas deals, say that most of the positives seem to have been priced in, after the stock’s steep (74 per cent) run up from its August lows of Rs 313.

Those at Motilal Oswal, who have analysed various valuation methodologies for BPCL to arrive at a target price range of Rs 518-593, now remain neutral because of several complexities involved in the strategic investment deal.

The high valuation is another reason for analysts to be cautious on the stock. BPCL is trading at 8.6x its enterprise value (EV) to operating profit (or Ebitda) multiple, based on its FY21 standalone estimates — which is a significant premium to Hindustan Petroleum’s 6.6x and Indian Oil’s 6.4x valuations. Further, analysts at Kotak Institutional Equities believe BPCL’s valuation is also at a premium to 7.5-8.0x the EV/Ebitda multiples indicated for the proposed stake sale in Reliance Industries’ downstream business to Saudi Aramco, as well as the government’s majority stake sale in Hindustan Petroleum to ONGC in January 2018. 

Analysts say the Street has already ascribed a 10x EV/Ebitda valuation to BPCL’s marketing business, which is also at a premium to the merger and acquisition deals in the global fuel retailing business. For BPCL to garner such valuations, clarity is also needed on issues pertaining to the resilience of deregulation in a rising crude oil price scenario.
It is not clear how the government plans to deal with BPCL’s Numaligarh refinery, or if it is considering selling the company’s investments in Petronet LNG, Indraprastha Gas, and Oil India separately, which are other points of concern for the Street. 

Analysts such as Nilesh Ghughe of HDFC Securities had valued BPCL’s investments in the Numaligarh refinery at Rs 44 a share, and its stakes in Petronet LNG, Indraprastha Gas, and Oil India at Rs 17, Rs 21 and Rs 1, respectively. If all these stakes and the refinery are sold separately, the overall valuation that BPCL’s strategic stake sale can garner may slump by up to Rs 83. The stock corrected by 5.7 per cent on Thursday, which was not surprising.

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