Last month, shares of state-run Bharat Petroleum Corp. Ltd (BPCL) had increased by about 25% in just four trading days on renewed expectations about its privatization. News reports suggested that many firms intended to participate in the bidding process and this boosted sentiments. However, with the deadline for submission of expression of interest being extended to September-end, the BPCL stock has cooled a bit, though the shares are 12% up since mid-July.
The company’s shares declined by about 2% on Friday after the announcement of the June quarter results. BPCL’s last quarter net profit was better than Bloomberg’s consensus estimates. During the pandemic crisis when firms are struggling to earn revenues, let alone eke out a profit, BPCL’s 93% year-on-year (y-o-y) growth in net profit to ₹2,076 crore brings comfort. Earnings before interest, tax, depreciation and amortization (Ebitda) rose 80% to ₹3,915 crore.
BPCL’s marketing segment did well because of robust margins, though its volumes declined. The marketing segment also had an inventory gain. However, the refining segment suffered because of subdued margins.
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“BPCL’s marketing segment can be expected to outshine the refining business for the rest of FY21 as well. While marketing margins have come off from their April and May highs, they still remain lucrative,” said Probal Sen, senior vice-president at Centrum Broking Ltd. “The only worry would be if the pace of recovery is slower than expected and, accordingly, volumes are hit more,” Sen said.
However, the outlook of the refining business is grim and depends on improvement in global demand. At present, subdued demand is leading to lower margins for the refining industry.
The divestment process is expected to be completed by March 2021 and news flow on the same would be key for the BPCL stock. Some analysts think meeting that the timeline is difficult to meet. “Multiple clarifications would be required by the potential buyer or a group of buyers before they decide to bid. This will be a time-consuming process, one in which the potential acquirers have no sense of urgency as would not be the case with the government, which is keen to sell BPCL this fiscal,” said Amit Shah, head of research at BNP Paribas India.
There would also need to be clarity on headcount reduction, sale of real estate and other unvalued upsides for BPCL, which result in asset valuation being higher than equity valuation of the company, Shah said. “We are of the opinion that such assurances would be hard to come by and also not something we would want to bet on,” he said.
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