Analysts are surprised at the Vedanta bid for BPCL and are posing the question as to how will Vedanta finance the acquisition given its own worries on leverage.
"While we are surprised by Vedanta Limited's confirmation that it has filed an Expression of Interest (EoI) for the government's stake sale in BPCL, we do understand the financial attraction, given that BPCL dividends could easily cover the cost of debt of any acquisition, on our estimates," JP Morgan said in a report.
"However, the question we have is how would Vedanta secure funding, given the worries on leverage at VEDL and the parent? While a ring-fenced SPV structure, where the debt is secured by the BPCL stake and serviced by dividends from the company, is possible, we would highlight that VEDL primarily has interests in operating upstream assets, and not downstream," it said.
However, VEDL has a track record of successfully creating value out of state-owned assets (Hindustan Zinc), and it could bring in other partners in any SPV, which would reduce the risk.
Vedanta has confirmed that it has filed an EoI for the BPCL stake sale and this is at a preliminary stage. In our view, an EoI does not automatically translate into an actual bid and VEDL could very well drop off in the financial round.
"While Vedanta on a consolidated basis is not very levered, the key question has been the leverage at the unlisted parent and the inter-company loans to the parent (currently at $1 billion). In this context, we struggle to see how VEDL secures funding," JP Morgan said.
However, an SPV structure which is ring-fenced and services the debt from dividends from BPCL could be possible.
Vedanta has no experience in running refining and fuel marketing, but has been able to create significant value from state-owned companies; an SPV with additional partners would allow for spreading the risk, the report said.
Vedanta primarily has interest in operating upstream assets, and not downstream and has not operated oil refining, fuel retailing or Petchem operations.
"However, VEDL has a track record of successfully creating value out of state-owned assets (HZ), and it could bring in other partners in any SPV. In addition, as we have highlighted previously, BPCL's FY23 profits would not reflect steady state profits and would be below mid-cycle profitability," the report said.