The Hindu Business Line : Bharat Petroleum: Sell

SHAREHOLDERS in Bharat Petroleum Corporation Ltd (BPCL) can consider exiting the stock at current prices or on minor rises from the current level. With the government indicating in clear terms in Parliament last week that BPCL would be privatised through a public offer and not a strategic sale, the stock appears to have lost much of the privatisation sheen.

There is profound uncertainty surrounding the mechanics of the privatisation such as the quantum of offer, the price and the timing, especially the last. In this context, shareholders may lose value by sticking to the stock. The recommendation is based purely on the market dynamics surrounding the stock and not on BPCL's fundamentals, which, however, are as strong as ever. BPCL is one of the stronger companies in the oil refining and marketing sector and easily the most aggressive in the marketplace.

With a cumulative capacity of 18.5 million tonnes (including its two subsidiaries Kochi Refineries and Numaligarh Refinery) and a retail network of more than 4,700 outlets, BPCL is a large player in the domestic oil industry. It is also an efficient refiner with a gross refining margin of $2.8 per barrel, which compares favourably with its domestic PSU peers.

Counter-balancing these pluses are the government's plans for the company. If the Petroleum Ministry has its way, BPCL would now have to revisit the Bina project, which it conceived in the mid-1990s, but subsequently gave up after it ran into environmental problems. BPCL can do with additional capacity in the liberalised era especially because its only refinery near Mumbai is old.

But it can afford to do it on its own terms and at its own pace since it has gained access to 10.5 million tonnes of refining capacity through the acquisition of Kochi Refineries and Numaligarh. However, the government is pushing for Bina and has even said that BPCL would make a public offer to generate funds for this project.

With plans for sale to a strategic bidder now cancelled, the government would continue to be the owner of BPCL even after it divests a part of its holding to the public.

This factor could be a major impediment for BPCL especially in a competitive milieu where Hindustan Petroleum is freed of government shackles.

A public float as per government plans could also lead to a bloat in the equity base of BPCL, which is something that the market may not like. Besides, the stock could be in for some devaluation with the government deciding against a strategic sale.