The Union Cabinet has approved the sale of its 53.29% stake in Bharat Petroleum Corp Ltd (BPCL) to a private entity. The state-owned company is one of the most profitable oil refiners and operates fuel stations. At the prevailing market cap, the government expects to garner about Rs 56,000 crore from the stake sale.
The government’s idea of privatising BPCL was to usher in greater competition in sectors that can sustain on their own. The government is keen to get international energy majors such as Saudi Aramco, Total SA of France and ExxonMobile to operate in the downstreama fuel marketing business so as to bring in greater competition. In fact, BPCL will offer attractive buy for global oil majors such as Saudi Aramco of Saudi Arabia. However, with global oil prices in a slowdown mode, the appetite for large acquisition becomes difficult.
Privatisation of BPCL would help realise a higher price and may take out politics out of auto fuel pricing. At present, BPCL operates four refineries at Mumbai, Kochi, Bina in Madhya Pradesh and Numaligarh in Assam with a combined capacity of 38 million tonnes of crude oil. The proposed stake sale will, however, exclude the strategic Numaligarh Refinery Ltd, which will be sold to another public sector company because it supplies fuel to the security forces in the North East. As a retailer of petroleum products, the company has over 15,000 petrol pumps and 6,000 LPG distributors. It accounts for a quarter of the fuel retail outlets in the country. Moreover, BPCL has stakes in gas companies such as Petronet and Indraprastha Gas and a presence in gas fields in Brazil and Mozambique.
What BPCL means to a strategic investor?
The strategic investor will get access to BPCL’s refining capacity and retail fuel outlets. As most metros are well proliferated in terms of retail outlets, it will be difficult for a new player to open up new retail outlets and land price is very expensive. In India, constructing depots and terminal is a major challenge because of myriad state and Central laws. In fact, BPCL alone accounts for 20% of petroleum product pipelines, 25% of marketing depots and 23% of retail outlets. So, it provides a lucrative entry point for the prospective strategic buyer. Also, with 26% and 24% share of petrol and diesel sales, respectively in the country, the company will be a strategic fit for any investor.
India is the third largest and one of the fastest growing petroleum markets in the world after the US and China with consumption of 5.2 thousand barrels of oil per day (kbopd). During 2013-18, the consumption of petroleum products in India came in at 6.4% CAGR as against 1.6% for the US. In 2019, India witnessed a growth of 3% in consumption of petroleum products. Rise in urbanization combined with better road connectivity is expected to result in sustained high growth of auto fuel consumption.
The decision on BPCL comes in the backdrop of the government opening up the fuel retail market by lowering the entry barrier and allowing all companies with a net worth of Rs 250 crore to set up outlets. The earlier rules required prior investments of Rs 2,000 crore for companies to enter the fuel retail segment, which favoured state-owned companies. In the private sector, Reliance Industries, Essar Oil and Shell India have presence in fuel retail.
Challenges in BPCL’s disinvestment
M&A Critique is a monthly business magazine, which gives M&A News, Deals and Analysis of Mergers and Acquisitions, Insolvency, Restructuring, Takeovers and Joint Ventures in India.