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Value to be unlocked in BPCL

Psst! Check out Bharat Petroleum Corporation Ltd.

Energy equity analysts say the once dowdy state-owned refiner is emerging as a top pick in India's fast-changing petroleum sector.

Specifically, its recent acquisition of additional refining capacity, coupled with its huge distribution network, positions Bharat Petroleum to profit from the decontrol of petroleum product prices in India next year, analysts say.

Its huge retail network of 4,510 petrol and diesel stations across India also makes it attractive to any global oil company which may decide to enter the Indian oil market when restrictions are lifted a year from now.

"BPCL is the best pick in the sector because of its value story," said Rajesh Jain, research head, Pranav Securities.

"The company's retail assets, efficient marketing and that the shortfall in its refining capacity has been made up, makes the stock attractive," Jain said.

Last week the government sold its stakes in three state-run refineries to two integrated, state-run oil companies to consolidate and strengthen those companies ahead of free competition from April 2002.

In one deal, BPCL bought the government's 55.04 per cent stake in Kochi Refineries Ltd, giving it another 7.5 million tonnes a year in refining capacity.

That will almost double the volume of petroleum products that Bharat Petroleum produces itself.

BPCL is also building a six-million-tonne refinery in Madhya Pradesh. BPCL is already India's second-largest refiner by revenue as it sold 18.86 million tonnes of petroleum products in the year to March 2000. But it produced only 8.87 million tonnes, and bought the remaining 53 percent from other refiners.

"The purchase of Kochi Refinery reduces to a very large extent BPCL's heavy dependence on others," said Chirag Shah, analyst with K R Choksey Securities.

BPCL paid Rs 6.591 billion for Kochi, funded through short-term bank loans. The company said it eventually plans to raise Rs 5 billion by issuing bonds and new shares, but did not mention a time frame.

BPCL serves some 30 million customers through 4,510 petrol and diesel stations across India, a retail reach that makes it attractive to global oil companies, analysts said.

BPCL also owns 58 per cent of those outlets, the highest percentage among India petroleum product distributors, and has been actively buying up franchisees over the last year.

And its drive to add convenience stores, co-branded credit cards and cash-dispensing automated teller machines (ATMs) within the stations is further enhancing the value to its retail chain.

"In the retail game, the company is definitely ahead of other competitors," said Kaushik Poddar, director, K B Capital Markets Ltd. "Any global major would pay a considerable premium for these company-owned retail pumps."

A March 16 research report by Goldman Sachs said BPCL was trading at a large discount to its regional peers, whereas it should be the other way round due to pending deregulation, privatization of the sector and tariff protection.

Despite appreciating 65 per cent since January 1, BPCL's shares, at Thursday's closing price of Rs 205.20, still trade at a price-earnings multiple of only 7.6. That is also far below the 19.46 average for the 30 stocks composing the Bombay Stock Exchange's Sensex.

The stock is also trading below its March 2000 book value of Rs 233, a figure which one analyst estimated would be almost twice as high now due to the purchase of Kochi Refinery.

"The replacement cost of BPCL, including all refining and marketing assets, subsequent to the purchase of Kochi refineries works out to be Rs 400 per share," Chirag Shah said.

However, analysts have a few concerns.

BPCL last week was directed by the government to purchase a 19 per cent stake in Numaligarh Refinery at Rs 10 a share from another petroleum marketing company, IBP Co Ltd.

BPCL already owns 32 per cent of Numaligarh, and analysts feel the purchase will be a financial drag.

"Buying refineries is not such a hot thing internationally until it's a cheap and a well-depreciated plant. Also Numaligarh's three-million-tonne capacity is not of international standards," Poddar said.

Analysts also said the government's divestment programme could grind to a halt again for any number of reasons.

Among other state-owned assets, the government has signalled its intention to sell its 66.2 per cent stake in BPCL.

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