Why the BPCL share price has fallen after Govt’s divestment announcement

The BPCL share price has shown a muted response to the government announcement to divest its entire stake in the company. BPCL’s share price declined by 2.74 per cent to Rs 529 after the market opened on Thursday. The key reason is the anticipation of a lower valuation for the company's Numaligarh Refinery.

Also, the BPCL share price has witnessed an over 70 per cent rise since August 23. In less than three months, the share has touched a high of Rs 549 from a low of Rs 308 in anticipation of a disinvestment announcement from the government. Therefore, at the current price, BPCL is fully valued in the near term, considering the disinvestment decision. 

Analysts told BusinessLine that BPCL’s overall valuation could be impacted as the company’s Numaligarh Refinery (NRL) would be carved out, to be taken over by another PSU.

Read also: Centre clears strategic divestment in five PSUs

Brokerage house Nirmal Bang is of the view that a share swap for taking over the NRL stake could imply some potential downside to BPCL's overall valuation. That is if NRL is valued at less than 10 times its price-to-earnings ratio. Such a scenario would impact BPCL’s earnings per share by Rs 6. The brokerage has, therefore, given a target of Rs 512 for BPCL shares, following the government’s big announcement on Wednesday, post market hours.

Finance Minister Nirmala Sitharaman on Wednesday said the government would sell its entire 53.29 per cent stake in BPCL, but the sale would exclude BPCL's NRL, in which the company holds 61.65 per cent stake.

“Our replacement cost based value of Rs 583 for BPCL includes Rs 62 per share or 10.6 per cent. Our Base case PE (price to earning) based target price of Rs 512 includes a similar value for NRL. The stake sale, excluding NRL, will only impact government receipts,” Nirmal Bang said in a morning note to its clients.

For BPCL investors, the stake will still offer value based on how it is valued in the proposed transfer to another PSU, most likely IOC or OIL India, which holds 26 per cent stake in NRL, Nirmal Bang said.