The Cabinet decision on Wednesday to sell the government’s 51.11 per cent stake in Hindustan Petroleum Corporation (HPCL) to Oil and Natural
Gas Corporation (ONGC, also a state-owned entity) won’t do much for the former’s public shareholders, say experts. It will help the government ease
its fiscal deficit and also benefit ONGC, but industry experts do not expect much to change for HPCL’s public shareholders.
The suggested transaction seems likely, at current prices, to fetch the government roughly Rs 30,000 crore. HPCL’s stake buyout means the refiner
will become a subsidiary of ONGC. So, instead of the government directly controlling it, ONGC will become the owner. making it status quo for HPCL
shareholders, assuming it continues to trade on the bourses as a separate entity.
Nor do experts see immediate gains for HPCL on the business front. “MRPL (Mangalore Refinery and Petrochemicals) has been a subsidiary of
ONGC for two decades but that has not changed much for MRPL. With the proposed deal, HPCL would be a subsidiary of ONGC and it would only
mean one entity (ONGC) selling its products (crude oil) to the other (HPCL), which is possible in a free market and does not need a shareholding
buyout,” said an industry expert, who did not wish to be identified. “It remains to be seen how efficiently HPCL is run by the oil major.”
MRPL operates annual refining capacity of 15 million tonnes (mt). HPCL has a refining capacity of 24.8 mt. ONGC, an upstream entity (exploration
and production segment) had crude oil production of 18.3 mt in 2016-17.
Most experts, industry and market, believe the immediate and key beneficiary of the deal will be the government, which has a divestment target of Rs
72,500 crore to meet in FY18. The deal will also ensure the government does not lose control over HPCL. “It is a good step for the government to
improve its fiscal deficit,” said Deepak Mahurkar, oil and gas leader at consultancy PwC India.
There are gains for ONGC, too. A merger will open access to a huge fuel retail network for it. MRPL has a fuel retailing licence but without significant
retail presence. HPCL has 14,412 retail outlets. Analysts at Edelweiss see a merger giving ONGC the benefit of a pure-play downstream company,
with presence in the lubes space, entailing significant diversification benefits. Also, globally, integrated oil majors enjoy higher return on equity or
shareholders’ funds, with stabler valuations, they added.
The real benefits might take longer to accrue. “It seems to be more of a shareholding pattern change. Other than that, it is business as usual and I do
not see any immediate synergy or cost saving. We do not expect any change in terms of staff cost. However, in future, there might be some cost
saving arising out of better procurement arrangements,” said an industry expert, who did not wish to be identified. Adding that both companies would
need to face several administrative challenges before reaping any cost-effective synergies.
In terms of financials, ONGC’s balance sheet and profit & loss account should get a boost. On a consolidated basis, for financial year 2016-17, it’s
net profit was Rs 21,478 crore, while HPCL reported Rs 8,236 crore. In revenue, ONGC’s stood at Rs 142,149 crore and HPCL’s at Rs 187,426
crore. ONGC buying out the government’s stake in HPCL, however, is expected to add to the former’s debt. G Chokkalingam at Equinomics
Research expects ONGC’s balance sheet to get further leveraged in funding the buying. Further, HPCL becomes a step-down subsidiary and a
holding company discount will be assigned. Analysts at CLSA also said the acquisition will be negative for ONGC, due to a notable rise in debt.
However, a fund manager with a top mutual fund house thinks the gains for ONGC are larger. It gets access to a robust front and upstream
operations, which otherwise take many years and lots of money. The acquisition will also provide some stability to ONGC's profits, vulnerable to oil
Importantly, he says, HPCL is a good asset, growing at a healthy pace and earning high RoE (well over 20 per cent versus ONGC's 10 per cent in
FY17). With HPCL, the consolidated RoE of ONGC would increase by 255 basis points, based on FY17 numbers, while the debt-equity ratio will
move up a bit, from 0.32 to 0.43.
The caveat for now is deal valuation. While details are awaited, some analysts doubt it happening at a big premium to current prices and also rule out
an open offer for HPCL's shareholders.
A K Prabhakar, head of research at IDBI Capital, said as the ONGC buyout of HPCL would not entail any open offer (both being government-
controlled entities), no benefits would accrue to the shareholders. Analysts at CLSA said in a recent report that a stake sale at a big premium to
market prices might raise hope of a lucrative open offer for minority shareholders but they see that as unlikely. If so, the HPCL stock, which has
outperformed peers Indian Oil and Bharat Petroleum in the past one to three months on hope of an open offer at a premium, could see pressure.