ONGC board yet to decide how to fund HPCL stake buy

To acquire govt's equity in HPCL, it will need to generate another Rs 15,000-17,000 crore

State-owned Oil and Natural Gas Corporation (ONGC) is yet to take a call on how it will fund the acquisition of public sector refiner Hindustan Petroleum Corporation (HPCL), but industry experts say the company should not consider selling its stake in Indian Oil until a crisis arises.

A senior ONGC executive told Business Standard that the company’s board would have to take a decision on how to fund the purchase. “The process could take long, as the ONGC board has never discussed the issue of buying the HPCL stake from the government. The Cabinet approval is only in-principle.” 

ONGC had cash reserves of Rs 13,013 crore as on March 31. To acquire the government’s equity in HPCL, it will need to generate another Rs 15,000-17,000 crore. There are two options before ONGC: either to sell its 13.77 per cent holding in Indian Oil or borrow. “Even if it raises Rs 30,000 crore in debt, the debt-equity ratio will rise to only 1:2. The company is comfortable,” said RS Sharma, former chairman and MD, ONGC.

Sharma said it would not be “prudent” for the company to sell its stake in Indian Oil. “The financials of Indian Oil have improved tremendously since under-recoveries are low. The Indian Oil stock should be sold only if ONGC is in a crisis mode,” he added. 

A Mumbai-based equity analyst, who did not want to be named, however, said instead of accumulating interest costs, ONGC should liquidate its investment, though the market was not conducive to sell the Indian Oil holding. “The market does not have the capacity to absorb Rs 25,000-27,000 crore worth Indian Oil stock, unless the Life Insurance Corporation comes in to buy,” the analyst said.

Though Sharma said the buy would help ONGC derisk its business, an analyst said there was no operational synergy between the two firms. 

“The deal will allow ONGC to navigate periods of oil price downturns relatively smoothly, as refining margins typically expand during such periods. In addition, the enhanced size of the combined entity can be leveraged to some extent while competing with international giants,” Dhaval Joshi, a research analyst with Emkay Global Financial Services, said.

“However, we don’t expect any significant operational synergies from the proposed merger. Moreover, there could be hindrances in HPCL's internal decision-making if ONGC management insists on taking an interest in day-to-day activities,” Joshi said.