16 Oct 2019
The stock of Bharat Petroleum Corporation (BPCL) has gained 28 per cent over the past one month following the government’s plan to sell its stake in the oil marketing firm to a strategic buyer. The government has now initiated a bidding process to find out an asset valuer to estimate the fair value of the company.
The ET Intelligence Group looked at the various parameters along with domestic and global deal comparisons to compute BPCL’s possible fair value. Currently, BPCL’s enterprise value is 8.2 times its next fiscal’s operating profit before depreciation and amortisation (EBITDA). This includes income from refineries, marketing of fuel, 10 per cent stake in the Mozambique gas asset and investment in other energy companies such Petronet LNG, IGL and Oil India. Mozambique gas asset has a total recoverable reserve of 60 trillion cubic feet and gas sales are expected to commence in the next two years after delay of over five years.
The immediate benchmark for investors will be the recent deal between Saudi Aramco and Reliance Industries (RIL), which valued the enterprise value of the latter’s refinery and petrochemicals assets at 7.5 times the next fiscal’s operating profit before depreciation and amortisation (EBITDA).
While RIL has superior refining facilities compared with BPCL, its deal with Aramco involved only economic interest. On the other hand, in case of BPCL, the strategic buyer will also get management control. This should compensate well for BPCL’s lower complexity of refining than RIL. Therefore, if one uses RIL’s valuation multiple for BPCL’s assets, including the domestic refinery and oil marketing infrastructure (without the overseas assets), the fair value works out to be Rs 620-625 per share.
Globally, the refinery asset deals have happened on an average of $43 per tonne per complexity based on the Nelson Complexity Index. Essar Oil’s deal with Rosneft of Russia implied $42 per tonne per complexity for 18 million tonnes of refining capacity. It had Nelson complexity index — a measure of complex crude a refinery can process — of 11.8. BPCL, on an average, has the complexity of around 8, thus valuation may be at 35-40 per cent discount to the global benchmark.
Back in the domestic market, the transfer of the government’s stake in HPCL to the upstream major ONGC happened at 6.2 times the EV/EBITDA. The multiple of this deal was compressed as the effective control remained with the government and entire exercise lacked competitive process. In the case of BPCL’s sale, the government looks forward to the participation of global investors through competitive bidding. This should fetch a higher multiple and may result in per share value of Rs 510.
The highest fair value emerges from the asset replacement valuation method. Elara Capital, a brokerage, pegs asset replacement value of BPCL at Rs 1,100 per share. The company had refinery throughput of 31 million tonnes in FY19, market sales of 43.1 million tonnes with presence of 14,802 retail outlets and a market share of 23.8 per cent. RIL’s deal with BP for retail network implies outlet valuation at Rs 10 crore per station. It means BPCL’s retail assets are available at a significant discount.
The various valuation methods thus reflect a valuation range of Rs 510- Rs 1,100 per share for BPCL. It will also dependent upon clarity by the government about the oil subsidy payment and contribution of the state-owned companies in the Ujjwala Yojana. In addition, the expansion of the Numaligarh Refinery in the North-East of India is done through viability gas funding (VGF). Any buyer would want to know how government will be providing VGF for the private company after change in control.
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