ONGC-HPCL deal: Government cuts itself a neat deal

Anand Kalyanaraman BL Research Bureau | Updated on January 27, 2018

The government is monetising its stake at top dollar valuations. The HPCL stock has had a dream run, gaining more than 700 per cent over the past four years.

Less than a fortnight before Budget 2018, the government, on the back foot due to shaky GST collections, brought out its big gun – the sale of its 51.11 per cent stake in HPCL to ONGC for a cool ₹36,915 crore, all cash.

The culmination of this mega-deal helps the government in many ways.

One, it easily meets the divestment goals for 2017-18, with the proceeds from the HPCL stake sale more than 50 per cent of the divestment target of ₹72,500 crore.

Two, the government will still exercise control over HPCL, even if indirectly. That’s thanks to the fact that HPCL will become a subsidiary company of ONGC which in turn is under the government’s control.

Three, the government will not have the headache of having to address difficult issues such as aligning organisational structures at the two companies — HPCL and ONGC, for now at least, will continue as separate entities.

Finally, and perhaps most importantly, the government is monetising its stake at top dollar valuations. The HPCL stock has had a dream run, gaining more than 700 per cent over the past four years.

This is thanks primarily to the rout of crude oil since mid-2014 and fuel pricing reforms that helped PSU oil refiners such as HPCL grow earnings manifold.

Also, the deal price at nearly ₹474 a share of HPCL is at a 14 per cent premium to the stock’s last traded price of ₹417. Ergo: the government has cut itself a very neat deal.

The same though cannot necessarily be said for the companies and their minority shareholders. ONGC, unlike HPCL, has been facing rough weather over the past few years - hurt by the rout of oil, low prices of domestic gas and stagnating output. In stark contrast to the multi-bagger HPCL stock, the ONGC stock has gone nowhere, gaining about one per cent over the past four years.

True, the stake acquisition in HPCL will hedge ONGC’s business risk at the consolidated level — with the now good-in-shape refining and retail business filling in for the in-trouble exploration segment. But ONGC would have had little choice in the deal including the premium price paid, but to obey the diktat by its promoter, the government which often uses it as a cash cow.

This happened in December 2016 too when ONGC was told to acquire Gujarat-government controlled GSPC’s 80 per cent stake in the latter’s not-so-successful Deen Dayal asset in the Krishna-Godavari basin for about ₹8,000 crore.

Sub-optimal capital allocation, if any, will impede the ability of the company to invest in the future. With cash and bank balance of about ₹13,600 crore as on September 2017, ONGC will likely have to borrow or sell its stake other companies such as Indian Oil or GAIL (India) to fund the stake purchase in HPCL.

Sure, an integrated presence across exploration, refining and retail, and a bigger balance sheet will give ONGC more bargaining power and access to capital for big-ticket global energy asset shopping.

But this could have been achieved through other mechanisms such as consortium bids by Indian energy companies or by dedicated global-energy focussed subsidiaries such as ONGC Videsh as has been the case so far.

For HPCL, the deal could bring some oil-sourcing benefits. But in the bargain, it loses autonomy in decision making with ONGC now calling the shots. Minority shareholders in HPCL will not also be pleased – ONGC has been exempted from making an open offer, thus depriving them the benefit of the 14 per cent premium over the last traded price being paid to the government.

Also, if HPCL is eventually merged into ONGC in the future, the company, one of the biggest oil refiners and marketers in the country today, will lose its identity altogether.

Published on January 21, 2018

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