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Raghuvir Srinivasan

The abrupt halt to the privatisation process brought about by the apex court has restored status quo in the oil industry.

WILL it be? Will it not be? The uncertainty is finally over and that may be the biggest gain from the Supreme Court's verdict on the privatisation of the oil twins, Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL). The two companies can now get on with their respective businesses without the Damocles sword of privatisation hanging over their heads.

The abrupt halt to the privatisation process brought about by the apex court has restored status quo in the oil industry. HPCL's privatisation was widely expected to change dramatically the underlying equations in the industry. The queue that lined up for the government's stake in the refining major — from Shell and BPAmoco downwards to our very own Reliance Industries — is ample indication of the kind of change that would have occurred in the dynamics of the oil sector had the privatisation gone through.

Now that that is not going to happen, what does the emerging competitive scenario look like? And what does the judgment mean for investors in oil stocks, especially HPCL and BPCL?

The most obvious inference is that the stranglehold of the government oil companies on the retail market will continue into the near future. Their position in the market appears quite secure at least for the next two-three years as the privatisation of HPCL and BPCL will, in all probability, be possible only after the next government takes over in 2004. And this is assuming that the incoming government is reform-minded, and has the required strength in Parliament to get the privatisation proposals through.

The ones to be affected by the developments now are the private players, domestic and multinational, which were banking on acquiring a share of the lucrative market for transportation fuels by buying one of the two companies. Reliance Industries, which was a serious bidder for HPCL, may have to rework and hasten its retail rollout plans now.

Reliance's marketing agreements with the oil companies — Indian Oil, HPCL and BPCL — expire in March 2004 after which it will either have to renew them or go on its own. The latter possibility now appears remote with HPCL going out of the radar screen. Reliance is already implementing its own retail network but it may be sometime before that can take the load of the entire production from its 27-million-tonne refinery. Given Reliance's strength in strategic planning it is likely that a possible failure of the HPCL option has already been factored into its plans. Yet, there is no denying the fact that the latest development imposes additional pressure on the company to hasten its own rollout plans.

Multinational companies, such as Shell, which had just commenced due-diligence of HPCL, will now have to consider other options of entering the Indian market. Shell already has a licence from the Government to set up 1,500 retail outlets, and one option that it must be considering is an independent rollout serviced by products from its refineries in the South-East Asian region.

The biggest losers will be the consumers themselves as the oil sector continues to be under government control with the attendant disadvantages, which are many. We are already seeing how despite the existence of a so-called free-market, the government still exercises control over pricing of fuels. The entry of a strong private player would have made it that much more difficult for the government to continue to wield its influence.

The HPCL stock may now lose some of its sheen. In fact, it dropped sharply on the day of the judgment but has now recovered marginally. The stock is already trading at about 18 times its annualised first quarter earnings. With a good second quarter earnings report expected, the stock may continue to trade at current levels in the run-up to the earnings announcement in October but may weaken thereafter.

The existing gap between the valuations of BPCL and HPCL may also narrow further in the days ahead. In fact, it already has to a large extent after the court verdict.

Historically, BPCL, as the more sprightly company, has traded at a premium to HPCL. But this situation reversed once HPCL was put on the strategic sale list. We could well see BPCL again surging forward in the absence of the privatisation handicap.

A point to ponder while discussing the valuations of HPCL is the large holdings of the stock by mutual funds. It is as yet unclear as to what strategy they are likely to adopt. But if they decide to capitalise on the existing valuations, the HPCL stock could be headed south.

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