BPCL Short Stock Analysis

Introduction:

Recently, BPCL is approved for divestment of its 61.65% stake in Numaligarh Refinery Limited (NRL). The stake sale in NRL has completed for the total amount of Rs. 9,876 crores. The expected receivable amount from this deal was about Rs. 8,700 to Rs. 8,800 crores. But Government received more than the expected amount and therefore it rejoiced the market. By this divestment, it is also expected that it will help in fastening the process of divestment process of the BPCL.

There are positive sentiments in market all around in regards with BPCL deal, but is this deal worth to grab the attention investors. Let’s read about it! 

About NRL:

• NRL or Numaligarh Refinery Limited, is a Public Sector Oil Company located in Assam, India.
• Before this divestment, Bharat Petroleum or BPCL was the parent organisation of the company.
• It operated a 3 million tonnes per annum oil refinery in Assam.

Screenplay of Stake Sale of BPCL in NRL:

• Before this divestment, BPCL was holding 61.65% stake in NRL, and with this deal, BPCL has fully exited their stake and has raised Rs. 9,876 crores.
• Meanwhile, with this divestment the other stakeholders of NRL have increased their stake by purchasing from the stake sale of NPCL.
• Firstly, Oil India Limited (OIL) has increased its  holdings from 26% to 69.63%, and has become the current biggest stakeholder of NRL.
• Then, Government of Assam has also increased their holding from 12.32% to 26%.
• Lastly, Engineers India Limited (EIL) has also participated in divestment process of NRL, and have purchased 4.32% stake.
• From this divestment process of BPCL, it is clear that, it is not the actual Privatisation. Only thing happened here is the turnaround of stakes from one government to another.

Is it really the Good News?

• If we look at this deal of BPCL-NRL, then it can be clearly seen that it has not met the true objective of divestment. 
• One benefit which BPCL can derive from this deal is ease in its  Privatization process. 

How will BPCL Utilize the proceeding from NRL deal:

1) To finance the deal worth Rs. 2,400 crores:

• BPCL holds 63.68% stake in Bharat Oman Refineries Limited (BORL), which built and operates a 7.8 million tonnes oil refinery at Bina.
• BPCL, further want to take their holding to 100%, and therefore, Last Month, they have agreed to purchase remaining stake in Oman Oil Company in Bina Refinery Project at the cost of Rs. 2,400 crores.
• With the completion of this deal, BORL, will become the 100% subsidiary of BPCL.  

2) Debt Reduction:

• BPCL may also plan to reduce its debt, especially their high interest-bearing borrowings.
• Currently, BPCL is having debt of Rs. 24,800 crores.
• With reduction in debt, it will certainly increase the burden of annual interest.
• With the contraction in debt amount, BPCL will also witness low Debt-to-Equity ratio, which will make the Privatisation deal more attractive.

3) High Chance of Dividend Distribution:

• Post BPCL-NRL deal, BPCL may also announce gift to shareholders by providing special dividend of Rs. 40-Rs. 50 per share in coming 2-3 months.
• BPCL already has a good dividend history. In the quarter end of FY21, BPCL has already given interim dividend of Rs. 16 per share to its shareholders.

Aftermath of BPCL- Post NRL deal:

• After the stake sale in NRL, BPCL will only have 3 refineries left, located at Mumbai, Kochi (Kerala) & Bina (Madhya Pradesh). These 3 refineries altogether make up 14% of India’s Oil Refining capacity.
• With 14% market share of India’s Oil Refining Capacity, BPCL will be one of the biggest companies in Oil Refinery sector.
• The government has already indicated that it expects to complete the BPCL Privatisation process, by the first half of the FY22.
• Few companies like Vedanta Group, Private Equity firm Apollo Global and I Squared Capital’s Indian unit Think Gas have already shown their interest in buying government’s stake of BPCL.
• BPCL is currently trading at 2.1 times its book value, which is at par with the long-term average. But as soon as the Privatisation process will start taking its pace, BPCL may trade at premium valuation in comparison with long term average.
• With Privatisation of BPCL, this company may also witness some value unlocking. 

Conclusion:

BPCL is one of the front runners in Privatization Race of PSUs. Privatisation process of BPCL, will certainly reward the shareholders and thereby this stock should be kept in radar.

The PSUs stocks are already diving the market rally and it will be really delightful to watch how these things will carry on further.