Consolidation in oil sector is all fine but when government uses its cash cow, ONGC to fund its fiscal deficit by selling its stake in HPCL, one wonders who benefits. Obviously the government as it raises a large sum for its disinvestment program. HPCL shareholders do not benefit as ONGC does not really assume full control of HPCL and does not integrate fully into a upstream and downstream oil company. ONGC shareholders will question if cash is being put to good use.
HPCL witnessed compounded sales growth of 6% in last 5 years and compounded profit growth is 21%. Hence, ideally the acquisition of HPCL as a subsidiary should help ONGC to smoothen its profit streams to a large extent at a consolidated level.
The union cabinet has approved the plan to sell the government’s 51.11% stake in HPCL (Hindustan Petroleum Corporation Ltd) to ONGC on 19th July 2017. Post announcement of this approval, share price of ONGC rose by 1.60% and that of HPCL fell by 4%. As per 20th July 2017 closing price, ONGC has to pay the government Rs.285 billion for the purchase of 51.11% stake.
The management control of HPCL would stay with the government through ONGC. Government owns 68.07% stake in ONGC, technically, the government’s hold over HPCL would be reduced from 51.11% to 35% (68.07% of 51.11%) effectively. This merger could facilitate large refinery projects in the country.
On a consolidated basis, ONGC witnessed tepid sales growth, compounded sales growth for last 5 years was 2% and compounded profit growth was -4.5%. ONGC’s subsidiary, ONGC Videsh, which is engaged in acquiring energy assets across the world, has also has been suffering from extreme volatility in oil prices. This impact has affected the profitability of ONGC.
As of FY17, ONGC has Rs. 130 billion as cash and cash equivalent, to fund this deal ONGC would require to raise Rs. 155 billion ( Total acquisition of HPCL as on 20th July 2017 is value at Rs.285 billion).