Govt to reconsider valuation of Bharat Petroleum

One way of selling a company is at its market value, when its share price is higher than the enterprise value—for example a knowledge-based entity that has insignificant physical assets.

The enterprise value of Bharat Petroleum Corporation Limited (BPCL) is estimated at around ₹800 per share, almost double its prevailing market value, which has caused concerns within the government as a section feels that the controlling stake in the oil company cannot be sold only on the basis of its stock price, two officials with direct knowledge of the matter said.

But a company like BPCL, which has significant physical assets, cannot be sold merely on the basis of its share price, the officials said, requesting anonymity. (Reuters File Photo)

One way of selling a company is at its market value, when its share price is higher than the enterprise value -- for example a knowledge-based entity that has insignificant physical assets.

But a company like BPCL, which has significant physical assets, cannot be sold merely on the basis of its share price, the officials said, requesting anonymity. Enterprise value is a comprehensive measure of a company’s total valuation, beyond its equity market capitalisation.

One of the officials, who is directly involved in the BPCL sale process, said the company’s share price was only one factor; the government has to factor in its assets such as refineries, pipelines, petrol pumps, brand value and real estate.

“Two things are quite important in BPCL’s disinvestment – valuation of peer companies and a premium of 20-30%,” the official said.

“After factoring in all these factors, government’s controlling stake in BPCL should fetch between ₹1 lakh crore and ₹2 lakh crore [including a premium},” he said.

The second official mentioned above said BPCL was a national asset and any major fluctuation in its share price or enterprise value after disinvestment could raise questions and could invite scrutiny by agencies such as Comptroller and Auditor General of India (CAG). The central government controls BPCL with a 52.98% stake.

“Employees association [of public sector oil companies] have already raised this issue with the government. According to them, the valuation of the company [BPCL] should be some way around ₹9 lakh crore. Although the valuation appears very high, their opinion cannot be ignored completely. As per the current market valuation, the government would get a maximum of about ₹45,000 crore to ₹50,000 crore, which is a hugely discounted price,” the first official added.

Consulting irm Deloitte Touche Tohmatsu India LLP is the transaction adviser to the department of investment and public asset management (Dipam), an arm of the finance ministry, managing BPCL’s disinvestment process. The petroleum ministry is the administrative ministry of BPCL.

Deloittte, Dipam and the ministries of finance and petroleum did not respond to queries on the matter.

Mukul Kumar, convener of the Federation of Oil PSU Officers (FOPO) confirmed having raised the issue with the government. “Yes, we wrote to the government about BPCL’s actual valuation, which is estimated around ₹9 lakh crore as per an internal calculation,” he said.

According to Gagan Dixit, vice president at equity research firm Elara Capital, the estimated enterprise value of BPCL’s assets is about ₹785 per share.

“I valued 1) retail outlets using RIL-BP deal, 2) pipelines, aviation fuel stations, lubes, industrial fuel network using 3-5x of earning multiple, 3) LPG plants and terminals/depots using capex required per unit, 4) refineries at INR 15,000/ton of capacity and 5) treasury stocks and equity investments at market rates,” he said.

The RIL-BP deal refers to Reliance Industries Limited’s sale of a 49% stake in the Indian conglomerate’s fuel retail business in 2019 for Rs. 7,000 crore.

The cabinet on November 20, 2019 approved the strategic sale of BPCL. The government invited expressions of interest (EoI) for selling off its stake in the oil company on March 7, 2020. Three interested parties have reportedly expressed interest in acquiring BPCL -- Anil Agarwal’s Vedanta group and two American funds, Apollo Global and I Squared Capital. Vedanta group and Apollo Global declined comments. I Squared Capital did not respond to an email query.

Dixit said the government should get a 50% premium over current market price. “I think BPCL’s value from the point of view of acquirer should be somewhere between earning value (INR 450) and asset based value (INR 785). The average of these two valuation gives INR 617/share (or INR 121,000 crore) value to BPCL, which is at 50% premium over current market price,” he said.

BPCL shares on Friday fell 2.98% to close at ₹396.15 on the BSE on a day of profit booking that saw the benchmark Sensex plunging 746.22 points (1.5%) to 48,878.54. The company’s share price was at a 52-week high of ₹510 on February 6, 2020; it hit a 2-week low of ₹252 on March 24, 2020.