Here’s what Ind-Ra thinks of BPCL stake sale

New Delhi: A potential stake sale of the entire government stake of 53.3 percent in Bharat Petroleum Corporation of India (BPCL) could result in reassessment of linkages between the government and oil market companies (OMCs), a Fitch Group firm, India Ratings and Research (Ind-Ra), said on Tuesday. BPCL stake sale is a part of the government's disinvestment target of Rs 1.05 lakh crores, which also includes disinvestment in other companies, namely Shipping Corporation of India, THDC India Limited ('IND AA+'/Stable) and North Eastern Electric Power Corporation Ltd, and a 30 percent stake sale in Container Corporation of India from the government holding.

Ind-Ra sees 2 alternatives to the proposed BPCL stake sale

The first scenario involves the acquisition of BPCL by OMCs or government entities. The key benefits of BPCL stake sale to an OMC would be the ease of structure with precedent being the Hindustan Petroleum Corporation Limited (HPCL)-Oil and Natural Gas Corporation Limited (ONGC) deal last year; easier streamlining given OMCs act as a policy implementation arm of the government providing subsidised LPG and kerosene; lesser complexity compared to privatisation given only around five months left for FY20 and lower resistance from BPCL employees, Ind-Ra said.

However, Ind-Ra believes the Competition Commission of India may have reservations on this deal, given the market, in this case, would become more concentrated. While the private sector is allowed participation in the decontrolled products, their share remains low. The valuation from this deal is also likely to be lower due to the absence of a control premium. Additionally, OMCs' liquidity could be impacted because of the deal leading to lower dividend payouts, which could affect in managing the fiscal position, the report said.

Second scenario

The second scenario involves the acquisition of BPCL by domestic private sector /international oil and gas companies. "Ind-Ra believes that privatisation, on the other hand, is likely to induce increased competition for the existing refiners and thereby bring higher efficiencies in the system. The private sector would gain easy access to the large retail marketing network of BPCL, taking the share of the private sector to around 33 percent from 11 percent currently.

Additionally, the fuel stations could be used for supplying other fuels such as compressed natural gas. Such a deal would also be beneficial for the government from a valuation point of view, given there would be a control premium," Ind-Ra said. While demand for petroleum products has been declining globally on account of increasing environmental concerns and thrust on electric vehicles, India continues to be a growth market, and thus a key market for international players.

There's an added complexity

However, BPCL's stake sale to a private entity has additional complexity, unlike other sectors where the subsidy is received only from the government. In the case of petroleum subsidy, the quantity of subsidy per unit is not fixed and the burden of the subsidy burden-sharing is still ad-hoc in nature. If privatisation was to happen, Ind-Ra believes that the concern with respect to the subsidy sharing needs to be addressed as the private players would be less interested to bear any pricing intervention in recovering subsidy dues from the government in case BPCL continues to be a policy implementation arm. Further, increasing political and employee resentment for privatisation along with challenges in continuing policy implementation could be possible deterrents for privatisation.

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Impact on Credit Rating of OMCs

In its rating action commentaries on the OMCs, Ind-Ra has been highlighting that the linkages could be re-assessed in the event of further fuel reforms in LPG and kerosene. The agency had also highlighted that it would reassess the linkages in case of a decline in government's stake in an OMC and would also assess the continuance of government control in an OMC's decision making and whether the OMC continues to act as an extended arm for implementation of government policies. Ind-Ra would also assess the ability of the OMCs to maintain pricing freedom in decontrolled products in case of high crude prices.

In October 2018, when petrol and diesel were decontrolled and crude prices had increased significantly, the government had instructed OMCs to absorb Rs 1/litre. In accordance with Ind-Ra's parent-subsidiary criteria, the agency continues to factor in Indian Oil Corporation Limited's and HPCL's strong strategic and operational linkages with the government and ONGC, respectively. In case an OMC/PSU buys BPCL, Ind-Ra would continue to assess the rating on the basis of these linkages which may further strengthen. In the case of privatisation, the standalone credit profile of IOC and HPCL would be reassessed if increased competition leads to pricing pressure and lower profitability for these OMCs.

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