Fitch downgrades BPCL’s rating to BBB; indicates divestment as an event risk

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Fitch ratings has downgraded BPCL’s rating at BBB with a negative outlook as it continues to treat the company’s potential divestment by the Indian government as an event risk. It has also added that uncertainties in bidder consortium and process complexities including valuation, could lead to potential delays in privatisation of Bharat Petroleum Corporation Ltd (BPCL). It said that the risks of further Covid-19 waves and international oil and gas companies increased focus on energy transition lead to additional uncertainty over timing and valuation of potentially large acquisitions in the sector.

The government is planning to sell its entire 52.98% stake in BPCL. It has received three expressions of interests including one from billionaire Anil Agarwal-led Vedanta Group have been received. The rating agency will make a review of its ratings, once there is significant progress.

Marketing margins reduction may result in delay of divestment

Fitch expects BPCL’s marketing sales to improve from 41 million tonnes in FY 21 to 43 million tonnes in FY 22, which was 6% below the FY 20 level.

It also reflected the impact on the petroleum product demand in India from the pandemic’s second wave in the first quarter of FY 22 and the risks of further waves, it said.

However, it expects the demand fall in FY 22 to be less severe than FY 21 as societal and business behaviour has adjusted, supporting activity and vaccination programme may prevent a severe recurrence in infections.

Gross Refining Margins (GRM) of the company are expected to improve to $3.5 per barrel in FY 22 from $1.9 in FY 21.

In FY 22 marketing margins of companies would maintain a steady base, including price increases to recoup capital expenditure on making their refineries compliant with their new emission norms, it said.

A reduction in MM may affect the government’s plan to divest BPCL, limiting any drastic reductions which may result in government reducing taxes in such a scenario, Fitch said.