To Sell BPCL at a lower price would be like selling diamond in Junk : Moily(Former Pet.Minister)

BPCL operates four refineries in Mumbai, Kochi, Bina (Madhya Pradesh) and Numaligarh (Assam. The company with a refining throughput of around 32 million metric tonnes per annum(mmtpa) in FY 2019, which is around 15 per cent of India’s refining capacity of around  250  mmtpa. The company also owns around 15000 petrol pumps out of a total of about 66000  outlets in the country, more than 6000 LPG (liquefied petroleum gas) distributorships and 51 LPG bottling plants. BPCL distributes 21 per cent of petroleum products consumed in the country and owns 61 of the 256 aviation fuel stations in the country.

Strategic divestment of the government’s 53.29 per cent stake in BPCL was approved in November 2019, along with transfer of certain management control. This excludes BPCL’s equity shareholding of 61 per cent stake in Numaligarh Refinery.

Despite being a good takeover target, the company sale plan had to be postponed on four occasions since March. It is expected that the process of disinvestment will move to the second stage after scrutiny of EOI’s by the transaction adviser, as per a tweet from the Twitter handle of the Secretary of the Department of Investment and Public Asset Management (DIPAM).

BPCL’s disinvestment is important for the Government to achieve its high disinvestment target of Rs 2.1 lakh crore for the current fiscal. Selling of entire 53.29 per cent stake is expected to generate around Rs. 60,000 crores as disinvestment proceeds as per recent reports in newspapers. During the Current Financial Year 2020-21 so far Rs. 6,138.48 crore has been obtained through OFS and IPO (source DIPAM). Meanwhile, the Market cap of BPCL has come down considerably to Rs. 80,913.03 crores as on 27th November 2020 considering the closing price of BPCL share as Rs 373 on NSE .The closing price a year ago ie on 27th November 2019 was much higher at Rs 505.9 at NSE. There is significant erosion in market cap in one year.

As per bidding procedure for BPCL the participation of public sector undertakings has been barred and only private entities could participate in the bidding process.

As per reports some 3-4 EOI’s have been received by closing date believed to be from some pension/PE funds.No interest as been shown by many major entities in this sector. Absence of major players in the bidding process including public sector may lower competition and impact evaluations, which may not be a desirable scenario for selling this money churner prized oil asset of India.

This gives rise to several questions.

Why did Reliance decide to keep away from bidding? Strategically acquisition of BPCL would have added nearly 22 per cent share in the fuel market in India to its existing negligible share.

Some of the major foreign entities are not bidding as they don’t see adding refining capacities as the world is trying to move away from liquid fuels and moving towards renewable and green energy.

Mining billionaire Anil Agarwal, who has a humble beginning as a scrap dealer, is also being speculated to be another potential bidder given his interest in the oil and gas. The concern now is that the pandemic does not result in distress sale of this valuable government asset at scrap prices.

Historically, privatization unlocks value. The earlier case of sale of Hindustan Zinc, also to Vedanta group is a case in example, where the value of the investment has multiplied over 50 times from 2002, the year of the sale , to 2020.

And that’s where the fear creeps in. Due to urgency of generating money from disinvestment and meeting the target,are we heading to sell BPCL at scrap prices? It is strange when indexes are heading toward lifetime highs, BPCL is falling.

While there is an immediate need to mobilize fresh funds for the government, the economic slowdown coupled with Covid crisis does not present the right time to go for PSU disinvestment. It must be given a deep thought that whether right valuation will come in absence of alternatives. Selling of public assets during this period may not be a good thing to do.

The real worth of BPCL is in the value of assets it owns, not the market cap. New owner can significantly unlock the value of assets using various mechanisms.