The potential sale of Centre's entire stake of 53.3 per cent in state-owned Bharat Petroleum Corporation of India (BPCL) may led to reassessment of linkages between the government and oil market companies (OMCs), said India Ratings and Research on Tuesday.
BPCL's stake sale is part of government of India's (GoI) disinvestment target of Rs 1.05 lakh crore, which also includes divestment of other public sector units such as Shipping Corp of India (SCI), THDC India Ltd and North Eastern Electric Power Corp Ltd, and a 30 per cent stake sale in Container Corp of India.
The Fitch group firm said that the government-OMC linkages could be re-assessed in the event of further fuel reforms in LPG and kerosene. "The agency would reassess the linkages in case of a decline in GoI's stake in an OMC and would also assess the continuance of GoI control in an OMC's decision making and whether the OMC continues to act as an extended arm for implementation of government policies," India Ratings (Ind-Ra) said.
On September 30, a core group of secretaries on divestment approved the privatisation of BPCL. The stake sale in BPCL is likely to see bids from international oil giants such as Saudi Aramco, Rosneft, Kuwait Petroleum, ExxonMobil, Shell, Total SA and Abu Dhabi National Oil Co.
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The agency said that it would also assess the ability of the OMCs to maintain pricing freedom in decontrolled products in case of high crude prices. In October 2018, when petrol and diesel were decontrolled and crude prices had increased significantly, the government had instructed OMCs to absorb Rs 1 per litre from fuel prices.
"The key benefits of stake sale to an OMC would be the ease of structure with precedent being the Hindustan Petroleum Corporation Limited (HPCL) - Oil and Natural Gas Corporation Limited (ONGC) deal last year; easier streamlining given OMCs act as a policy implementation arm of the government providing subsidised LPG and kerosene; lesser complexity compared to privatisation given only around five months left for FY20 and lower resistance from BPCL employees," Ind-Ra highlighted.
However, the Competition Commission of India (CCI) may have reservations about this deal, given the market in this case would become more concentrated, it said.
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While the private sector is allowed participation in the decontrolled products, their share remains low. The valuation from this deal is also likely to be lower due to the absence of control premium, the agency highlighted. Additionally, OMCs' liquidity could be impacted because of the deal leading to lower dividend payouts, which could affect in managing the fiscal position.
Ind-Ra believes that privatisation on the other hand is likely to induce increased competition for the existing refiners and thereby bring higher efficiencies in the system. The private sector would gain easy access to the large retail marketing network of BPCL, taking the share of private sector to around 33 per cent from 11 per cent currently. Besides, the fuel stations could be used for supplying other fuels such as compressed natural gas (CNG).
"Such a deal would also be beneficial for the government from valuation point of view, given there would be a control premium," the agency said.
While demand for petroleum products has been declining globally on account of increasing environmental concerns and thrust on electric vehicles, India continues to be a growth market, and thus a key market for international players, Ind-Ra noted.
Edited by Chitranjan Kumar