India may have to sell BPCL shares for less than the best price⁠ as the government needs money

India may have to sell BPCL shares for less than the best price⁠ as the government needs money
Bharat Gas trucks at BPCL refinery.thumb_image
  • Standing firm on its decision, the Indian government has announced that its plans to ‘divest BPCL is very much on’.
  • One of the reasons behind the government’s decision to go ahead with BPCL divestment could be the loss of revenue and the massive stimulus package further bleeding its reserves.
  • The company sells a fifth of all petroleum products sold in the country.
The shares of state-owned fuel refiner Bharat Petroleum Corporation (BPCL) were trading at over ₹500 a piece when the government announced that it will sell a little over half the company. Analysts at Prabhudas Lilladher expected the government to make over ₹83,000 crore from the sale.

Today, BPCL shares are available at ₹329, they have lost 35% of their value in the last three months. However, that hasn’t stopped the government from going ahead with its plan to sell stake in the company this year because, cash crunch!

The government needs money to stimulate the economy and tax collections are likely to be down. Selling assets may be necessary. And that is why, the deadline for submitting bids has been extended to July 31.

When the price is right..

However, Pradhan noted that the divestment in BPCL will be done at an appropriate time. “We believe BPCL now presents deep value as the value of its investments and non-core assets accounts for nearly its entire value,” stated a report by Edelweiss research dated May 11, 2020.

The company sells a fifth of all petroleum products sold in the country. The value of the core refining business makes BPCL even more valuable but the market is not willing to pay the price.

BrokerageTarget priceUpside (from May 27)
Edelweiss₹ 52568%
Nomura₹ 39025%

“Due to Covid-19, BPCL’s ongoing divestment is likely to be delayed to 2HFY21F or even FY22F. Also, given increased concerns on marketing, weak demand/margin, and likely reduced interest from NOCs (national oil companies) in the current scenario, we believe the likely valuations will be lower,” stated a Nomura report dated May 21, 2020.

India needs money to revive the economy

With economic growth expected to plummet in the months to come, the government is also bracing for a steep fall in tax the goods and services tax (GST) collections. According to the SBI Ecowrap report, the government will have a loss of INR 10.4 lakh crore in FY21.

“When India had first imposed a lockdown, our GDP estimate was 2.6% and since then it has been progressively reduced to a negative 4.7%, with nominal GDP witnessing a contraction,” the report said.

In addition to this, the ₹20 lakh crore stimulus package is also likely to hurt the government's coffers - some of which it has tried to make up for by hiking excise duty on petrol and diesel by up to ₹13 per litre. Low crude oil prices have helped the government shore up some money via high taxes to fund the COVID-19 relief measures.

India’s fiscal deficit⁠— the difference between what the government earns and spends⁠— is estimated to be 5.5%, according to Moody’s. The difference will have to come from either borrowing or sale of assets like the shares of BPCL.

Government wants more private players in strategic sectors

“Let me categorically assure investors and stakeholders, recently the Finance minister on her package announcement has categorically come out with a new policy approach on PSUs. For BPCL we have taken a decision prior to COVID-19 situation and we are very firm on our decision,” said Dharmendra Pradhan, Minister for Petroleum and Natural Gas in an interview with CNBC-TV18.

This should come as no surprise, especially after Finance Minister Nirmala Sitharaman said that the government will go ahead with its divestment plans, and even in strategic sectors, public sector undertakings will be limited to a maximum of 4 companies, while the rest will be opened up to the private sector. Oil marketing is a sector that is currently a state monopoly, controlled by three government companies.


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