This consolidation could facilitate mega-refinery projects in the country – joining hands for mega oil & gas projects becomes a time-consuming process for independent entities. There were a few mega-project proposals jointly announced by independent PSUs in the past but most of them never took off. This move also paves the way for more consolidations and stake sales in the oil & gas sector.
As far as HPCL shareholders are concerned, the proposed deal would not have any significant implications in the short term. It is just an issue of change in the ownership from the government to a government-owned entity. However, in the longer term, once these two companies work together as parent and subsidiary, and employees start accepting this structure and reducing the (working) cultural differences, there exists the possibility of a complete merger to create a mega oil & gas entity. The same possibility in the long-term would place the ONGC shareholders, relatively, in a much better position.
Relatively speaking, HPCL has grown quite consistently. Its net profits grew over the past 5 years from Rs 905 crore in FY2013 to Rs 6,209 crore in FY2017. Whereas for ONGC, on standalone basis, it fluctuated quite widely over the years and it actually fell from about Rs 21,000 crore in FY2013 to Rs 18,000 crore in FY2017. While the refinery and retail sale of fuel businesses are relatively quite stable, oil and gas prices have been extremely volatile over the past 10 years.
ONGC’s subsidiary, ONGC Videsh, which is engaged in acquiring energy assets across the world, has also has been suffering from extreme volatility in oil prices. Hence, the acquisition of HPCL as a subsidiary or an ultimate merger would help ONGC to smoothen its profit streams to a large extent at a consolidated or standalone level.
Though ONGC may end up with a fresh debt of over Rs 17,000 crore, assuming that it uses cash and cash equivalent of around Rs 13,000 crore (on standalone basis) for this deal, it is likely to emerge as a net gainer in the long-term. HPCL can make ROCE (return on capital employed) of around 20 per cent (much higher than current borrowing costs) and also help ONGC in its efforts towards vertical integration of business and in smoothening its profit streams in the future.
The author is founder & managing director at Equinomics Research & Advisory.
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.