The potential sale of the entire government stake in Bharat Petroleum Corporation Limited (BPCL) could result in a reassessment of linkages between the government and oil marketing companies, Fitch group firm India Ratings and Research said on November 5.
Traditionally, oil marketing companies (OMCs) have been used by the government to push its inclusive agenda, the latest being the dole out of free cooking gas (LPG) cylinders to poor women's households.
BPCL's stake sale is part of the government's disinvestment target of Rs 1.05 lakh crore, which also includes divestment of other state-owned companies such as Shipping Corporation of India (SCI), THDC India Ltd and North Eastern Electric Power Corp Ltd, and a 30 percent stake sale in Container Corporation of India.
"India Ratings and Research (Ind-Ra) believes a potential sale of the entire government of India stake of 53.3 percent in BPCL could result in a reassessment of linkages between the government and OMCs," it said in a statement.
The government stake in BPCL could either be sold to another OMC or a government entity. Alternately, it could go to a domestic private sector firm or an international oil and gas company.
"The key benefits of stake sale to an OMC would be the ease of structure with precedent being the Hindustan Petroleum Corp Ltd (HPCL)-Oil and Natural Gas Corp Ltd (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," it said.
However, the Competition Commission of India (CCI) may have reservations on this deal, given the market, in this case, would become more concentrated.
While the private sector is allowed participation in fuel marketing, their share remains low. The valuation from this deal is also likely to be lower due to the absence of control premium, Ind-Ra said adding 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 the private sector to around 33 percent from 11 percent currently.
"Additionally, the fuel stations could be used for supplying other fuels such as compressed natural gas. Such a deal would also be beneficial for the government from a valuation point of view, given there would be a control premium," the statement 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.
"However, BPCL's stake sale to a private entity has additional complexity, unlike other sectors where the subsidy is received only from the government. In the case of petroleum subsidy, the quantity of subsidy per unit is not fixed and the burden of the subsidy burden-sharing is still ad-hoc in nature.
"If privatisation was to happen, Ind-Ra believes that the concern with respect to the subsidy sharing needs to be addressed as the private players would be less interested to bear any pricing intervention in recovering subsidy dues from the government in case BPCL continues to be a policy implementation arm. Further, increasing political and employee resentment for privatisation along with challenges in continuing policy implementation could be possible deterrents for privatisation," it added.
In its rating action commentaries on the OMCs, Ind-Ra highlighted that the linkages could be re-assessed in the event of further fuel reforms in LPG and kerosene.
The agency had also highlighted that it would reassess the linkages in case of a decline in government's stake in an OMC and would also assess the continuance of state control in an OMC's decision making and whether the OMC continues to act as an extended arm for implementation of government policies.
Ind-Ra said 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 Re 1 per litre.