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Run ONGC to buy government stake in HPCL for Rs 36915 crore

Run ONGC to buy government stake in HPCL for Rs 36915 crore

The government is monetising its stake at top dollar valuations. HPCL is now a Central Public Sector Enterprise (CPSE) with majority shareholding (51.11%) by President of India The equity shares of HPCL are listed on the Bombay Stock Exchange and the National Stock Exchange.

ONGC, India's biggest explorer, said on Saturday it will pay 369 billion rupees ($5.77 billion) for a 51.1 percent stake in HPCL, or 473.97 rupees per share. Two state-owned insurance companies, GIC and New India Assurance were listed on stock exchanges this fiscal.

The stake sale will help the government meet more than of half of its asset-disposal plan for the year to March 2018 and is crucial for narrowing its budget gap.

Addressing the media on Sunday, ONGC's CMD Shashi Shanker, however, said the company has kept all financing options open.

HPCL can acquire MRPL either by buying out ONGC's shares, which at today's trading price is worth just over Rs 16,000 crore. Ergo: the government has cut itself a very neat deal. "It will also enhance the value for minority shareholders". ONGC will also gain access to marketing network of HPCL which could be synergistically utilised for projects such as MRPL, OPaL. It holds 67.72% stake in ONGC. 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.

Sub-optimal capital allocation, if any, will impede the ability of the company to invest in the future.

ONGC is the largest producer of crude oil and natural gas in India, contributing around 70% of Indian domestic production. "So, if we do it together, we will have greater bargaining power".

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.

Assuming 100% debt funding, the deal translates into a payback period of ~5-6 years for ONGC, based on our assessment of HPCL's earnings trajectory. But in the bargain, it loses autonomy in decision making with ONGC now calling the shots.

The stake sale would also help the government boost state revenue and bridge the fiscal deficit at a time when shortfall in GST collections led to India's fiscal deficit for the first eight months of 2017-18 reaching Rs 6.12 lakh crore or 112 per cent of the full year's target. When asked about the possibility of merging HPCL and another group company, the BSE-listed Mangalore Refinery and Petrochemicals Limited (MRPL), Shanker said that now no decision has been taken on the matter.

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