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The focus over the last week has been on PSUs – the PSU shares have got Viagrized, thanks to the sell off of IBP and VSNL announced by the government. Immediately in the aftermath of the announcement, Reliance group shares fell. Reliance Petroleum at Rs 29.15 is trading at 9.4 x FY02E. We believe the stock is a STRONG BUY at current prices because:

• The major concern on the stock front has been the uncertainty on marketing front. We believe that the company’s present marketing arrangement with IOCL would continue for some more time and there will not be any disruption.

• While there has been some disappointment in the failed bids for IBP, the results may be just as per the company’s gameplan. IBP's major outlets are in the eastern part of the country. For Reliance Petro it would have meant higher transportation costs. With IBP going to IOC and PSUs out of the bidding race, Reliance will have more than an even opportunity of bagging BPCL (preferably) or HPCL.

• The government has announced that HPCL and BPCL would be privatized within three months of APM dismantling, i.e., by June-July 2002. This would suit Reliance Petroleum perfectly.

• Back of the envelope calculations show that Reliance group would have to pay Rs55.2bn to acquire a 46% stake in BPCL at an assumed price of Rs400/ share.

On face of it given the size of the two companies viz. HPCL and BPCL one should be indifferent to bid for them. But we feel that it makes sense for RPL to bid for BPCL. This can be substantiated with following:

Currently, the supply of POL products is more than the demand for it. This is true on aggregate basis. But if we see the statistics in detail, there are some regions, which are still in deficit of POL products that are fed by the regions which are in surplus. This can be illustrated by following graph. It depicts the overall supply -demand scenario. For simplicity we have considered the figures of % basis and not the absolute ones. 

South is at breakeven level. West is in surplus with same case in east. These two regions supply the northern region, which is deficit. Currently due to APM, the mass consumption products like MS, HSD, LPG, SKO can be marketed by the oil companies without bothering their cost of transportation.

Post APM even though the subsidy continues for LPG and SKO the auto fuels, which constitute 55% of total consumption, would be allowed to be priced freely. It is not economically feasible for every player to market these products in area of deficit (the northern region). Hence those companies which have refining capacities and marketing set up in northern, eastern, western region would have a strategic advantage.

Now which company fits in these criteria? The answer can be found out from following two tables.

It is clear from above two tables that IOC undoubtedly has strong presence in north and east region with 37% of its refining capacity and 33% of marketing assets (including that of IBP) positioned in northern region. Next to IOC in northern region is BPCL with 29% of its marketing assets positioned in north and 18 % of its refining assets in northeast region (Numaligarh refinery). Even tough HPCL has got more retail outlets in north; it has no refining capacity to back that demand. Swapping the products on regional basis would be done on commercial basis as against current system in which offsetting is done. Hence the margins of marketing would come under pressure by swapping the products post APM.

RPL has 100% of its refining assets positioned in west. With Kandla-Vadinar pipeline (KVPL) getting operational it can transport its products to north at a minimum cost. Further distributing it through BPCL's R.O. would maximize the margins.

Also, BPCL has strong foothold in western region. It has its retail outlets positioned in prime locations and are having highest throughput (per R.O.) w.r.t. the industry. Acquisition of Kochi refinery has escorted it to foray into South, which was earlier dominated by HPCL. Thus BPCL has presence all over the country, which is beneficial for the prospective bidder.

Since government has banned the PSUs for bidding for BPCL and HPCL RPL and MRPL are the only Indian companies left out for the race along with MNC like Shell. Since Birla's are trying to get out of petroleum sector, we believe that RPL would be the only serious local bidder left alone in the race.

Considering all above facts and given the strong presence of BPCL throughout the country, we believe that RPL as per its game plan has bided lower for IBP and would bid aggressively for BPCL which would give it a ready playing field. Given the inherent operational strength of RPL backed with efficient management, we believe that RPL would be biggest beneficiary of the process of deregulation and divestment.

Hence we recommend a strong buy on RPL.

Team 5paisa

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