HPCL Deal To Be Earnings Accretive For ONGC, Brokerages Says

India’s largest oil explorer, Oil and Natural Gas Corporation Ltd.’s consolidated earnings per share would still rise even if it funds the entire acquisition of Hindustan Petroleum Corporation Ltd. by raising long-term debt.

That’s the word coming from brokerages, as they expect ONGC’s consolidated EPS for financial year 2018-19 to rise in the range of 4-6 percent if the deal is fully funded by debt.

ONGC will be paying a 14 premium to current market price to acquire Government of India’s stake in Hindustan Petroleum Corporation Ltd., the company said on Saturday.

ONGC on a standalone basis is debt free, while on a consolidated basis the net debt-to-equity of the company is as low as 0.2 times. Other than raising debt, it has other option like using cash and stake sale in four listed companies. Shashi Shanker, chairman and managing director of ONGC, said that they will fund the acquisition using a combination of cash and stake sale and debt.

Here’s what the brokerages had to say:

IDFC Securities

• Lower premium a key positive for ONGC.
• Price would set fair value benchmark for HPCL; positive for the stock.
• Expect Indian Oil Corp. to merge its subsidiary (CPCL), and/or buy government stake in Oil India.
• ONGC + HPCL to help price hedging objectives, but only partially.

BOB Capital Markets

• Consolidated debt/equity ratio to increase to only 0.4 times as against 0.2 times.
• Acquisition to give access to 26 percent RoCE business.
• Expect no merger or operational synergies as HPCL will be an independent entity.

Motilal Oswal

• Win-win for minority shareholders of both companies.
• Remain positive on both ONGC and HPCL.
• Consolidation to reduce volatility in earnings.

CLSA

• Negative for IOCL and GAIL (India) as ONGC might sell stake to fund this deal.
• Chance of similar deals in 12-24 months to be an overhang on IOCL and BPCL.
• HPCL’s outperformance to peers may reverse now.
• ONGC’s stock price should see a big relief rally.