ONGC-HPCL buyout: A better deal for ONGC?

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Published: January 22, 2018 10:14:49 AM

After India’s oil giant ONGC finally entered into an agreement to buy a majority stake in HPCL, adding Rs 36,915 crore to Arun Jaitley’s kitty for this financial year itself, top brokerages say that ONGC is slated to benefit from the deal.

ongc hpcl deal, ongc hpcl acquisition, hpcl ongc acquisition, Sudhir Vasudeva, Sudhir Vasudeva ongcOn Saturday, ONGC announced the acquisition of the Central government’s entire 51 per cent stake in HPCL for over Rs 36,900 crore. (Image: Reuters)

After India’s oil giant ONGC finally entered into an agreement to buy a majority stake in HPCL, adding Rs 36,915 crore to Arun Jaitley’s kitty for this financial year itself, top brokerages say that ONGC is slated to benefit from the deal. Notably, ONGC has entered into a share purchase agreement for acquiring the government’s entire 51.11% stake of HPCL at a cash purchase consideration of RS 473.97 per share with a total acquisition cost of Rs 36,915 crore, the state-run exploration and production company said in a statement.

The parties expect to complete the transaction before end of January 2018, ONGC added. The acquisition price is at a 13.8% premium to HPCL’s closing share price on Friday. Research and brokerage firm Macquarie said that the deal puts ONGC in a comfortable position, as the firm would see a 9% EPS accretion. The firm has reiterated its outperform rating on the shares.

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“For HPCL, reference valuation is at a 14% premium to last close. HPCL bulls will be disappointed as price is below Rs 650 valuation,” the firm noted. Accordingly, Macquarie has a neutral call on the shares of HPCL with a target of Rs 475. HPCL shares lost more than 2% this morning, and were trading at Rs 404.15 on NSE.  The firm observed that ONGC’s consolidated net Debt-Equity will be manageable at 35%. The global firm said that shares of ONGC remain it’s top large cap pick from E&P space in Asia.

Another global firm, Jefferies has retained its buy call on the shares of ONGC, while maintaining underperform on HPCL. The firm said that earnings remain central for ONGC’s share price outlook. “ We peg HPCL’s march 2018 FV at Rs 349, 27% lower than what ONHC is paying.”

As of 31 March, ONGC’s consolidated debt stood at Rs 55,681 crore, translating into debt-to-equity of 0.25 times. IDFC Securities estimates ONGC group debt (including the $1.2 billion for Gujarat State Petroleum Corp. Ltd’s Krishna-Godavari assets and $2.2 billion for Russia’s Vankor field) could rise substantially if it buys the 51% stake in HPCL by raising debt and by not monetizing its ~14% stake in IOCL.

“For HPCL, specifically, the transaction changes little on ground, with the company retaining its independent identity and only direct ownership changing hands,” pointed out Probal Sen of IDFC Securities in a recent report.

The deal will add raise nearly Rs 37,000 for the government.The fiscal deficit reached Rs 6.12 trillion or 112% of the full-year budget during eight months to November. In less than a month of announcing additional market borrowings of Rs 50,000 crore for the fiscal year ending March-18, the government announced on Wednesday that it has cut its requirement to Rs 20,000 crore from Rs 50,000 crore estimated earlier.

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