On November 20, 2019, the Cabinet approved the strategic sale of the public sector oil and gas company, Bharat Petroleum Corporation Limited (BPCL).
The central government owns a controlling stake of 52.98% in the company.
While the current market value of BPCL is Rs 382.50 per share (as we write), its enterprise value is estimated to be around Rs 800 per share.
This has raised concerns among the government officials, some of whom believe that selling the oil company on the basis of its stock price would lead to a discounted loss.
BPCL Enterprise Value Almost Double its Market Value
As stated above, BPCL’s estimated enterprise value is almost more than double than its prevailing market value. This has caused waves of concern amidst the government
BPCL, unlike a knowledge-based entity, has significant physical assets like refineries, pipelines, petrol pumps, brand value and real estate. This pulls up its enterprise value way above its stock price.
One way of selling a company at its market value, is when its share price is higher than the enterprise value. However, a company like BPCL cannot be sold only on the basis of its share price; its enterprise value must be factored in too.
Enterprise value is a comprehensive measure of a company’s total valuation, beyond its equity market capitalisation.
BPCL Employees Estimate Co Valuation at Rs 9 L Cr
An official involved directly in the BPCL sale process says, “Two things are quite important in BPCL’s disinvestment – valuation of peer companies and a premium of 20-30%”.
He added that on considering all the factors, the government’s controlling stake in BPCL should fetch between Rs 1 lakh crore and Rs 2 lakh crore, including the premium.
Another government official mentioned that as BPCL is a national asset, any major fluctuation in its share price or enterprise value could give rise to questions and scrutiny by audit agencies, like Comptroller and Auditor General of India (CAG).
HT reports, “Employees association [of public sector oil companies] have already raised this issue with the government. According to them, the valuation of the company [BPCL] should be some way around ?9 lakh crore. Although the valuation appears very high, their opinion cannot be ignored completely. As per the current market valuation, the government would get a maximum of about ?45,000 crore to ?50,000 crore, which is a hugely discounted price.”
This means, as per internal calculations, BPCL’s actual valuation is estimated around Rs 9 lakh crore.
Estimated Enterprise Value About Rs 785/Share
The VP of an equity research firm Elara Capital, Gagan Dixit estimates the enterprise value of BPCL’s assets to be about Rs 785 per share.
Dixit said the government should get a 50% premium over current market price. “I think BPCL’s value from the point of view of the acquirer should be somewhere between earning value (INR 450) and asset based value (INR 785). The average of these two valuation gives INR 617/share (or INR 121,000 crore) value to BPCL, which is at 50% premium over current market price,” he said.
Source: Hindustan Times
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