Government puts off privatization of BPCL for now

For the last 2 years, the government has been trying hard to divest its 52.98% stake in BPCL. At times, the timing was not right and at times the pricing was not right. Eventually, after a 2 year attempt, the government has decided to put off the privatization of BPCL for the time being.

Mostly, the government will take a fresh view on the company from a valuation perspective and then look at divesting the stake. For now, government is holding on.

One of the key reasons is that most of the potential bidders expressed their inability to participate in this divestment due to the energy markets being in a state of flux. While Vedanta, I-Squared Capital and Apollo Global had responded to the EOI, the government had hoped for a much wider response.

Big global names like Saudi Aramco and Rosneft had shown interest originally but eventually decided to back out from participating in the deal.

The expressions of interest (EOI) for the 52.98% stake in BPCL was first invited by the government in March 2020 and 3 bids had come in by November 2020. However, the decision was then put in the back burner due to the global disruption and chaos created by the COVID pandemic.

During this period, oil had even briefly dipped into negative zone. Most potential buyers are sceptical about BPCL due to lack of clarity on fuel pricing policy.
 

The three investors who had shown interest were the Vedanta group, Apollo Global and I-Squared Capital. However, the two funds eventually backed out as they could not get investor interest in a fossil fuel companies, especially when the fuel pricing policies were not too transparent.

Post their withdrawal, only Vedanta was left in the race, making the entire divestment bidding process unviable. That is when government opted to cancel the EOI.

Globally, most of the funding in the hydrocarbons segment is going towards green energy, green hydrogen etc. The interest in fossil fuels is quite low, especially considering that they have a strong carbon footprint and are too dependent on crude prices.

In the Indian context, retail oil prices were kept static between November 2021 and March 2022 even as crude was up 70%. This led to a sharp profit fall for OMCs. That is the kind of policy uncertainty that global investors are not too comfortable with.

What does the future hold for the BPCL divestment deal. One way is to sell 26% stake with management control. However, the bigger question is of fuel pricing, which is still too politically driven in India. One thing the government may do is to go back to the drawing board and rework the core focus of BPCL.

The best way to create value is to refocus the company as a green energy company rather than as a fossil fuel company. After all, that is the direction in which global valuations are gravitating. That is the best bet for BPCL. 

BPCL is a valuable franchise with the third largest refining capacity in India after Reliance and IOCL. It has a strong value narrative, but it needs a more powerful communication.