Dividend payout hope post Numaligarh Refinery deal drives BPCL stock

Investors of Bharat Petroleum Corportion (BPCL) were handsomely rewarded on Tuesday as market participants rushed to the counter on hopes of special dividend payout. Shares of the state-owned refinery hit fresh 52-week high of Rs 482.4 apiece, up 6 per cent on the BSE, as its Board approved to offload the firm’s holding in the unit for Rs 9,878 crore ($1.3 billion) as part of BPCL’s privatization process.

The country’s second-biggest state refiner will sell its 61.65 per cent holding in to a consortium of Oil India Ltd. and Engineers India Ltd. and may also include the state government of Assam, according to an exchange filing.

The participation of the Assam government is subject to the Right of First Refusal (RoFR). In case the state government does not exercise the RoFR, the entire stake will be acquired by the consortium. The transaction requires approval of BPCL’s shareholders and is expected to close within one month after obtaining all requisite approvals.

Oil India currently holds 26 per cent in Numaligarh Refinery, which operates a 3 million-tonne-a-year oil refinery in Assam. The refinery is being expanded threefold to meet the region’s growing fuel demand. Assam state government owns 12.35 per cent in the company.

Analysts now expect the deal to kick-start a massive drive in the country, starting with BPCL, as the Centre looks to speed up the process of state-owned assets to help plug the budget gap. Prime Minister Narendra Modi’s is targeting to raise Rs 1.75 trillion from the sale of assets in the upcoming fiscal year (FY22).

At the micro-level, analysts hope the sale proceeds will not only fuel BPCL’s own process, but will also help the state-owned firm to distribute one;time special dividend.

Analysts at Emkay Global, for instance, consider the development as an important milestone in BPCL’s disinvestment process, expected to complete by early Q2FY22. “The cash proceeds may be distributed as special dividends of Rs40-50/share to shareholders,” it said in a report dated March 2.

Valuing on NRL’s annual Ebitda (average Rs 3,100 crore in FY17-19, and Rs 4,000 crore based on 9MFY21 run rate) and an enterprise value (EV) of Rs 14,740 crore, Emkay Global sees the transaction’s value at 3.6-4.7x EV/EBITDA, and 5.5-7.9x PE (Rs 2,000-3,000 crore PAT). While the brokergae thinks it is lower than the ballpark rate of 5-7x and 8-10x, respectively, but, on a PB basis, it is reasonable at 2.5x based on 9MFY21 balance sheet, it says.

“In our SOTP, we valued NRL at 6x FY18-20 average annual Ebitda to come at a Rs 17,100 crore valuation. Hence, the Rs 16,020 crore transaction value is 6 per cent lower than our estimate. However, it lowers BPCL’s TP-FV by just Rs3.4/share… . We maintain our estimates and TP of Rs 495 for BPCL, valuing core business at 6.5x FY23E EV/EBITDA. Valuation set in financial bids can lead to further upsides in Fair value,” it said in its report.

Last week, finalized commercial terms for acquiring Oman Oil’s 36.62 per cent stake in Bina refinery for Rs 2,400 crore. Post completion of the transaction, it will hold 100 per cent stake in BORL. On an EV-to-EBITDA basis, the company has signed the NRL/BORL deal at 7.8x/7.4x FY20 EBITDA.

In light of these two deals, Motilal Oswal Financial Services expect the company to have incremental cash of Rs 7,480 crore, which may either be used to reduce BPCL’s consolidated net debt in FY22 to Rs 40,800 crore or pay incremental dividend of Rs 38/share, in addition to the interim dividend of Rs 16/share announced in 3QFY21.

That said, the management has to now deal with its whollyowned subsidiary – Bharat Petro Resources (BPRL). Despite an investment of Rs 21,500 crore, BPRL recorded a loss of Rs 300 crore in FY20. An impairment of Rs 1580 crore was further recorded in 3QFY21, noted analysts at MOFSL.

“We value the company at 2.1x FY23E book to arrive at our TP of Rs 520. Ascribing the aforementioned deal value of 7.5x EV-to-EBITDA to its Refining business, our SoTP suggests a standalone business value of Rs 400/share (at 8x FY23E EBITDA for the Marketing and Pipeline business), with additional value of investments of Rs 200/share. Thus, our SoTP derived valuation for BPCL stands at Rs 600/share,” the brokerage said.

Global brokerages, too, see an upside of up to 21 per cent. JPMorgan has set a target of Rs 550 on the stock while Jefferies see the one-yeat target price at Rs 500. CLSA, meanwhile, see ot at Rs 450 per share.

“The deal peggs NPL’s equity value at Rs 16,000 crore, 16 per cent lower we assigned for BPCL’s valuation. Using this lower valuation, our fair value for BPCL deceases by Rs 9 per share or 2 per cent. In the past, the management has been non-committal on whether the sale proceeds would be higher dividend pay out to shareholders or to deleverage BPCL’s balance sheet,” analysts at CLSA noted in their recent report.

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