HPCL stake sale to ONGC hits valuation hurdle; deal may complete this FY

This comes two days after ONGC had sent a request for proposals to banks for raising one-year loan of Rs 250 bn to acquire govt's stake in HPCL

The sale of the government's stake in Hindustan Petroleum Corporation (HPCL) to Oil and Natural Gas Corporation (ONGC) is stuck on valuation. According to persons close to the development, the effort was to close the deal before the end of the month but the government was looking at getting a higher value for its 51.1 per cent stake in HPCL.

A meeting regarding this was held at the Department of Investment and Public Asset Management (Dipam) on Friday, an official said. This comes two days after ONGC had sent a request for proposals to banks for raising one-year loan of Rs 250 billion to acquire the government's stake in HPCL.

Based on the current market capitalisation, a 51 per cent in HPCL is valued at Rs 323 billion, about Rs 23 billion higher than in last July when the Union Cabinet had cleared the sell-off. However, reports suggest that after evaluating the marketing network, physical assets and brand value of HPCL, the valuation could be around Rs 450 billion.

 

The government had appointed JM Financial as the transaction advisor and Cyril Amarchand Mangaldas as the legal consultant last year. A report submitted by JM Financial to the government in November valued the assets of HPCL at Rs 1.14 trillion, which if accepted may lead to a higher outgo for ONGC at Rs 580-600 billion.

"Such a valuation will be a huge loss for ONGC. Anything above Rs 300-350 billion may affect the financial health of the company. There is lack of co-ordination among the government machineries in this regard. Moreover, the valuation by JM Financials is too high for ONGC," said a person working closely with the deal.

ONGC had appointed SBI Caps and Citigroup as merchant bankers and Shardul Amarchand Mangaldas as the legal advisor.

The Cabinet Committee on Economic Affairs had given in-principle approval for the strategic sale on July 19 last year. HPCL stocks, which were at Rs 384 a share, have zoomed to Rs 415 per share at one point on Friday. The shares had touched a 52-week high of Rs 493 on September 9 last year. On August 22, the ONGC board had cleared the deal. Petroleum Minister Dharmendra Pradhan had said the deal would happen within this financial year only.

The government's non-tax revenue is hugely dependent on the deal. As on January 2, total disinvestment proceeds for 2017-18 stood at Rs 538 billion against the target of RS 725 billion set by Finance Minister Arun Jaitley. If the ONGC-HPCL deal works out, this will be first time since 2009 that the government would be surpassing the disinvestment target.

"We have time till March 31. The ONGC-HPCL deal will be completed soon and will count towards this year's disinvestment proceeds," a senior official said on Friday.

The Centre was hoping to substantially overshoot its disinvestment target for 2017-18. Dipam is also looking at state-owned NBCC buying out the government equity in a construction PSU. There could be three more initial public offerings, three offer for sales, and a second tranche of the Centre's Bharat-22 exchange traded fund.

As opposed to a budgeted target of Rs 725 billion, the Centre could garner anything between Rs 900 billion and Rs 1 trillion, and if these materialise, they could go some way to make up for the shortfall in other revenue items such as the goods and service tax.