comment. ONGC-HPCL Deal: Good for the govt, not so much for the PSUs

The government’s move to sell its 51.11 per cent stake in refiner HPCL to hydrocarbon explorer ONGC helps it in many ways.

First, it could make the government richer by about ₹30,000 crore, going by the current market capitalisation of HPCL. That’s about 40 per cent of the 2017-18 disinvestment target of ₹72,500 crore, though it’s not clear how the government will account for the proceeds, given that the stake sale is to another government company and not to outsiders.

Next, despite the stake sale, the government will retain control, although indirectly, over HPCL. That’s because HPCL will become a subsidiary of ONGC, a company controlled and managed by the government.

Also, a stake sale through a holding company-subsidiary company mechanism rather than a merger, will help avoid thorny issues such as aligning different organisational structures and work cultures — HPCL and ONGC will continue as separate entities within their domains of expertise.

The botched merger of Air India and Indian Airlines in the past decade seems to have guided the government to take a safer path. The stake sale move has also been timed very well. The HPCL stock has had a dream run, more than trebling over the past three years, thanks to the rout of crude oil and fuel pricing reforms such as diesel decontrol. This removed the overhang of under-recoveries from the PSU oil refiners and helped their earnings grow manifold.

Monetising the stake Essentially, the government has moved to monetise its stake in HPCL when the stock is at its all-time high.

The final price at which the deal is closed and approved remains to be seen. In short, quite an elegant and enriching rejig for the government.

But the same cannot be said for ONGC and HPCL. For one, ONGC will be paying top dollar for buying the controlling stake in HPCL. It seems to have little choice or say in the matter though, and has to obey the diktat by its promoter, the government.

Minority shareholders in ONGC though may not be pleased — they have about 32 per cent of the shareholding. Reports suggest that an open offer to acquire an additional 26 per cent in HPCL by minority shareholders may not be required to be made by ONGC. But if an open offer is mandated, that may mean an additional outflow of about ₹15,000 crore at current HPCL stock price levels.

Govt stake buys This is the second time in less than a year that ONGC has been told to buy out government stakes in other companies. In December 2016, 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. There are apprehensions in many quarters that this is a bailout deal for GSPC that is straining under high debt. Sub-optimal capital allocation, if any, will impede the ability of the PSU companies to invest in the future.

As it is, the rout of crude oil over the past few years and the low prices of domestic gas, formula-fixed, has hurt ONGC.

The company’s output has also been stagnating. Unlike the multi-bagger HPCL stock, the ONGC stock has lost close to 40 per cent over the past three years.

As on March 2017, ONGC at a consolidated level had cash and equivalents of about ₹16,600 crore and debt in excess of ₹55,000 crore.

The stake buys now will require the company to borrow or sell its stakes in other companies such as Indian Oil to finance the deal. While a low debt-to-equity ratio of less than 0.5 times does give ONGC room to borrow, it will add to its balance-sheet stress. Sure, an integrated presence across exploration, refining and retail, and a bigger balance sheet after consolidation of stake in HPCL will give ONGC more bargaining power and access to capital in the highly competitive arena of big-ticket global energy asset shopping. But it is moot whether the same could not be done 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, backed by government guarantees.

The silver lining for ONGC is that the stake acquisition in HPCL will hedge its business risk at the consolidated level — with the now good-in-shape refining and retail business filling in for the in-trouble exploration segment.

For HPCL, which is on a strong footing now, becoming an ONGC subsidiary may not bring much gain other than oil-sourcing benefits, if any, to some extent. There are risks though of loss of autonomy in decision making. For instance, some reports suggest that ONGC subsidiary and standalone refiner MRPL could eventually be merged with HPCL. While that may not necessarily be a bad thing, such big decisions in the future will effectively be taken by ONGC and not by HPCL.

What shape this proposal will take — whether all public sector upstream and downstream companies will merge, or whether there will be two or three separate majors in different segments — needs to be seen.

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