ONGC-HPCL buyout: HPCL unlikely to gain from the Rs 37,000 crore deal

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Updated: January 25, 2018 6:06:52 PM

Oil and Natural Gas Corporation (ONGC) acquisition of Hindustan Petroleum Corporation Limited (HPCL) would be credit neutral for the ratings of HPCL, India Ratings and Research (Ind-Ra) said in a report.

ONGC-HPCL buyout: HPCL unlikely to gain from the Rs 37,000 crore deal. (Image: Reuters)

Oil and Natural Gas Corporation (ONGC) acquisition of Hindustan Petroleum Corporation Limited (HPCL) would be credit neutral for the ratings of HPCL, India Ratings and Research (Ind-Ra) said in a report. ONGC, which is 68.94% held by the government, will acquire government’s 51.11% stake in HPCL for Rs 36,915 crore. The acquisition may possibly result in some synergies in terms of low crude procurement cost for both HPCL and MRPL, but in case ONGC eventually looks to integrate MRPL, HPCL may have to resort to additional borrowings.

“The reason behind additional borrowings is that HPCL is likely to register negative free cash flows over FY18-FY21 owing to its large impending capex and limited cash and cash equivalents,” Ind-Ra said.

“Moreover, HPCL may consider a combination of share swap and cash payout, where ONGC would get additional stake in HPCL against its shareholding in MRPL. In the event of MRPL merging with HPCL, Ind-Ra expects HPCL’s net leverage to remain below 3 times over FY18-FY20,” it added.

To help fund the Rs 36,915 crore acquisition of HPCL, Oil and Natural Gas Corp (ONGC) recently received approval from the government for selling its stake in IOC and GAIL. To help fund the Rs 36,915 crore acquisition of HPCL, Oil and Natural Gas Corp (ONGC) has received approval from the government for selling its stake in IOC and GAIL.

Earlier, 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. “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.

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