BPCL raising capital, will others follow in Indian Oil & Gas sector?: IIFL Capital Services

23 Jun 2023 , 10:48 AM

BPCL’s operating cashflows + balance sheets are adequate to fund its capex (Rs1.3-1.4trn over next 5 years). Its capital infusion plans may be towards securing govt’s budgetary support (Rs300bn grant for OMCs for energy transition). To analysts of IIFL Capital Services, VGF route would be more effective as in case of pipeline projects. Rights issue may balance the interest of minority shareholders; may work well for IOCL, but not for HPCL, as it is now owned by ONGC.

BPCL raising equity, despite being adequately capitalised: 

BPCL Board will meet on 28th June and finalise modalities for capital infusion, including the rights issue. BPCL’s operating cashflows and underleveraged balance sheet are adequate to fund its Rs1.3-1.4trn capex plans across E&P, retailing, petrochemicals, speciality chemicals, CGD, RE etc., over the next 5 years for which such move is not fully understood. Perhaps, govt plans to extend the Rs300bn financial support to OMCs (as committed in budget) through the fund raise. Even then, VGF could have been a far effective route.

HPCL a peculiar case:

As of now, HPCL and IOCL have not intended to raise equity but may follow if the plan is to secure govt grant and be fair to minority shareholders. Govt stake in IOCL/BPCL is 51.5%/53% respectively, for which it may still be able to subscribe to rights issue/capital infusion plan. HPCL’s case is a bit peculiar, as ONGC owns 55% controlling stake and securing the grant towards energy transition through rights issue may not be feasible. Moreover, any such move to dilute ONGC’s stake will raise issues of governance. Pending clarification, such uncertainty will likely weigh heavy on ONGC & HPCL stock prices.

One of the best years ahead: 

Over the past 20 years, OMCs have grown their refining capacities, marketing infra multifolds without capital infusion, which reflects strength of their revenue models — and to that extent — analysts of IIFL Capital Services are not too convinced on capital raise. Besides, any move to raise capital by diluting minority shareholders (that too at depressed valuations) will be the key negative from stock’s re-rating perspective. Analysts of IIFL Capital Services think OMCs are well poised to report strong financial performance in FY24, on back of multiple tailwinds – Russian oil, super-normal marketing margins, strong product sales, etc.