ONGC deal is not value accretive for HPCL shareholders: analysts

Hindustan Petroleum Corporation Limited (HPCL) slipped 4.4 per cent to Rs 367 on the Bombay Stock Exchange (BSE) on Thursday, a day after the Union Cabinet approved the sale of its 51 per cent equity in the company to Oil and Natural Gas Corporation (ONGC) post market hours, while ruling out the possibility of an open offer to the minority shareholders of HPCL given no change in effective ownership.


Since July 12, HPCL has outperformed the market by gaining 12 per cent till Wednesday on reports that the merger with ONGC will be completed by the end of this fiscal year. ONGC, which ended 1.8 per cent higher at Rs 166 on Thursday, has gained 1.7 per cent as compared to 0.66 per cent rise in the S&P BSE Sensex since July 12.


Analysts have given a thumbs-down to the deal, which they feel will not be value accretive to HPCL’s shareholders. Going ahead, HPCL will continue to operate as a separate entity, albeit with a possibility of a merger with MRPL – another ONGC subsidiary – in the future. On the other hand, as a majority shareholder in the company, it will be within the means of ONGC to leverage HPCL's balance sheet, they say.


“The apprehension is that a full merger will not be value accretive to the shareholders of HPCL, which has enjoyed a 900 per cent appreciation in price in the last three years. That is because; HPCL and BPCL have been the two biggest beneficiaries of the free pricing of petrol and diesel,” points out a note from Angel Broking.


That apart, the merger will be a long drawn process, the benefits of which, will take a lot of time to reflect in the operations and financials of both these companies. Analysts at Kotak Institutional Equities have already cautioned that they don’t foresee operational or financial synergies from this transaction going ahead and expect HPCL’s stock to erase all recent gains.


“HPCL’s minorities will not gain anything from this transaction, irrespective of the price, if the government choses to avoid an open offer. Nevertheless, HPCL stock will likely reverse recent rally, which was backed by the hopes of an open offer-based on the news flows indicating that the government may seek 40-50 per cent premium price for HPCL from ONGC,” write Tarun Lakhotia and Akshay Bhor at Kotak in a post deal note.


ONGC’s subsidiary, ONGC Videsh, which is engaged in acquiring the energy assets across the world also has been suffering from extreme volatility in oil prices. Hence, acquisition of HPCL as a subsidiary or ultimate merger would help ONGC to smoothen its profit streams to a large extent at a consolidated or standalone level.


“The deal will not benefit retail shareholders HPCL a great deal. At the current levels, we are not comfortable holding on to HPCL and have a reduce rating on the stock. ONGC, on the other hand, has huge value and becomes a buy at the current levels. We have a target of Rs 217 on the stock,” explains A K Prabhakar, head of research at IDBI Capital.


On the other hand, 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. From an industry standpoint, analysts say the deal could facilitate a mega refinery projects in the country and paves the way for more consolidations / stake sales in the oil & gas sector.


“This consolidation could facilitate mega-refinery projects in the country. 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,” says G Chokkalingam, founder and managing director of Equinomics Research & Advisory.

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