Wednesday, August 03, 2005

Bongaigaon Refinery (BRPL)

BRPL paid Rs 12 dividend last year. On a stock price of Rs 90, that is 13% yield. The company is still profitable, despite the lid on retail oil prices that the government has kept over the last year. Last 2 qtr EPS has been around Rs 3.50, implying a annual EPS of Rs 14.00 and P/E ratio of 6.5x.

Indian Oil owns approx. 75% of the company, and has requested the government to merge BRPL with itself. Merchant bankers have been appointed. Considering that valuations in oil sector in India are at their troughs due to the continued governement meddling, this is the opportune moment for IOC to buy good assets cheaply. As IOC owns 75% of the company, it is very likely that the exchange ratio they come up with to exchange BRPL shares into IOC stock screws existing BRPL stockholders. But can they offer an exchange ratio below where the stock has traded over the last 6 months, which is the Rs 85-Rs 104 band approximately?

The stock is going ex-dividend on Aug 12. Say stock price before that is Rs 90. After the pay-out of Rs 6 dividend, stock will go to Rs 84. If a I-banker would calculate the exchange ratio that day, how would he incorporate the future dividend streams in his valuation of the company? Or would she say that Rs84 stock price discounts the future dividend payments, and so no adjustment needs to be made? But if we see dividend paying stocks in US, like Citizens Communications and Panamsat - they derive their value precisely because they are high dividend paying. As such, investors in BRPL who are their for dividend yield would not like to be invested in the lower yielding IOC stock. So maybe, the exchange ratio would value BRPL at higher than Rs 84. Tricky question, but this is THE catalyst for the stock..

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