Bharat Petroleum Privatization Can Be Delayed; Credit Rating Becomes Negative, Labeled As ‘Event Risk’

Even though the union government had announced privatization plans of BPCL a long time ago, the actualization of the plan seems far from complete. In that blurry scenario, Fitch Ratings on Monday said uncertainty over the bidder consortiums and process complexity, including valuation, may lead to potential delays in the privatization of India’s second-largest fuel retailer, Bharat Petroleum Corporation Ltd (BPCL).

Fitch is cautioning against investments in the sector

While affirming BPCL’s rating at ‘BBB-‘ with a negative outlook, the rating agency said it continues to treat the potential divestment of the company by the Indian government as an event risk.

The rating agency believes that the risks of further COVID-19 waves and global oil and gas companies’ increased focus on energy transition have lead to additional uncertainty over the timing and valuation of potentially large acquisitions in the sector.

The rating agency will be reviewing the ratings once significant progress is achieved in this matter.

It should be noted that the government is selling its entire 52.98 percent stake in BPCL. The government has received three expressions of interest (EoIs) including one from billionaire Anil Agarwal-led Vedanta Group.

Improvement on the horizon

“We expect the demand fall in FY22 to be less severe than FY21 as business and societal behavior has adjusted, supporting activity, and the vaccination program may prevent a severe recurrence in infections,” Fitch said.

According to reports, BPCL’s gross refining margins (GRM) are expected to improve to USD 3.5 per barrel in FY22 from a core GRM of USD 1.9 in FY21.

Comments on some other parameters

Fitch also took an assessment of BPCL’s status, ownership, and control by the sovereign and called it ‘Strong’.

“BPCL has received tangible support from the state through parliament-approved subsidies to meet under-recoveries on products sold below market prices. It has also received indirect government support for its overseas upstream acquisitions.”

Fitch also assessed the socio-political implications of a default by BPCL as ‘Very Strong’.

“A default would disrupt economic activity and significantly affect India’s energy security as BPCL is a leading oil refiner and oil-marketing company (OMC) in the country, and has a key role in importing crude oil to meet a large share of India’s energy needs,” the rating agency said.