BPCL: The goose that laid golden eggs

In one of the stories in Aesop’s Fables, a villager and his wife owned a hen that laid a golden egg every day. They presumed that the hen must contain a great lump of gold in its womb, and in order to get the gold, they killed her. Having done so, they found, to their surprise, that the hen was no different than other hens -- and that there were no golden eggs.

The pair, thus hoping to become rich all at once, deprived themselves of the gain of which they were assured day by day.

The fable might have been written in ancient Greece, but it could offer lessons in contemporary times as well. In India, a classic example of this age-old adage coming true could be the government’s divestment plan of oil marketing company -- Bharat Petroleum Corporation Limited (BPCL).

For perspective, BPCL has given dividends worth Rs 10,046 crore to the government, since Prime Minister Narendra Modi took charge in May 2014, a DH analysis of data available with BSE shows.

This number is estimated to be way higher than the dividend paid to the previous government.

These dividends don’t include the payout towards the Life Insurance Corporation, that owns a 5.88% stake in the company, over and above the government’s 53.29% stake.

The divestment of such companies have a benefit for the government: it helps in curbing fiscal deficit numbers and cheers up the markets. However, the receipts coming from one-off inflows like divestments are meant to be considered as financing items, as per the IMF’s Government Finance Statistics Manual -- as the government is losing assets in lieu of maintaining fiscal discipline.

In such a scenario, when the government is struggling to meet its own targets, the sale of the stake in BPCL doesn’t come as a surprise at all.

For anyone who picks up stake in BPCL, it would be worth all the money they put in it – solely on the basis of the market access the OMC provides them.

Dwindling cash balance

As per the company’s annual reports, it has seen its cash and bank balance decline by 45% on a compounded basis every year since the end of FY2016. The company’s cash reserves were pegged at Rs 662.52 crore at the end of March 2019, down 84% from Rs 4,202 crore three years ago.

On the other hand, short-term borrowings of the state-run firm stands at Rs 8,598.95 crore, showing a compounded annual growth rate of a whopping 606% in the past three years.

At the end of the FY19, the total short-term borrowing of the company had multiplied by 352 times from the levels seen three years ago (Rs 24.4 crore).

This situation is quite similar to what is happening in Hindustan Aeronautics Limited (HAL), where non-payment of dues by the armed forces has increased dependence of the company on its cash reserves and short-term borrowings.

BPCL saw a huge surge in borrowings during 2016-17 when it borrowed foreign currency loans worth Rs 6,761.47 crore, which analysts believe is to fund expansion.

The cash flow statements of the company reveal that the capacity expansion and dividend payouts have been weighing heavy on its cash reserves.

The company, however, did not respond to the queries sent by DH, despite repeated attempts.

On the operational front, the company has seen its top line grow by a healthy 16% on the compounded basis over the past three years – to Rs 3.41 lakh crore from Rs 2.19 lakh crore.

In revenue terms, this makes BPCL India’s sixth-largest company.

However, as oil prices have increased in the global markets, the company’s costs have increased.

The company has seen a CAGR of 1% in its bottom line in the past three years – from Rs 5,082 crore to Rs 7,802 crore.

Cash cow for investors

Despite these headwinds, the company has been a cash cow for its investors. The company in the past four years has distributed dividends worth Rs 20,032 crore (inclusive of tax) – more than half of which has filled in the coffers of the Centre.

Also, in the past three years, despite muted growth in the bottom line, the dividend distribution has grown annually by 15% -- to Rs 4,553 crore from Rs 3,024 crore in FY16.

The amount of dividend paid to the government under PM Modi was also enhanced by the two back to back bonus issues by the company in 2016 and 2017. While after the bonus issues, the number of shares owned by the government in BPCL tripled in a matter of just 19 months (with a reduced share value), dividend per share continued to be on the similar lines.

However, when it comes to scaling in the business, BPCL is worth a buy, according to market analysts. With a market share of 21%, BPCL is the country’s 2nd largest OMC with the domestic sales volume of over 43.07 million metric tons (MMT) in FY19 and 41.21 MMT in FY18. The company controls 15% of the country’s refining capacity.

Also with 14,802 retail outlets, the company controls 25.77% market share in the retail distribution of petrol and diesel.

For anyone who buys the government’s stake in BPCL, the move will give them access to a huge market.