A pressure gauge sits on outdoor pipework at the underground gas storage facility. (Photographer: Martin Divisek/Bloomberg)

IOC, BPCL May Have To Raise Debt If They Buy Government’s Stake In GAIL

Indian Oil Corporation Ltd. and Bharat Petroleum Corporation Ltd. will have to borrow funds if the state-owned refiners and marketers acquire the government’s stake in GAIL (India) Ltd., the nation’s largest gas marketing and transportation company.

India’s top two state-owned refiners could equally buy the government’s holding, newswire PTI reported, quoting unnamed people. The government’s 54 percent stake in GAIL is valued at close to Rs 40,000 crore.

IOCL and BPCL, however, are nearly Rs 23,000 crore short as the two, according to their September filings, had Rs 7,400 crore and Rs 9,500 crore cash, respectively.

This cash balance would have further reduced as both the companies had declared hefty dividends in the month of February. IOCL had declared a dividend of Rs 19 per share, while BPCL declared a dividend of Rs 14 per share. Also, in the past none of the companies in the last seven years ever had cash and cash equivalents of more than Rs 20,000 crore.

RS Sharma, former chairman and managing director of Oil and Natural Gas Corporation Ltd., isn’t sure how the two companies will benefit from such a deal. “Buying less than 50 percent stake in GAIL won’t benefit IOCL or BPCL in any way as it will not become subsidiary of either of them.

GAIL will just remain as portfolio investment in their books.
RS Sharma, Former CMD, ONGC

The government stands to gain though. The possible deal, similar to ONGC’s acquisition of its holding in Hindustan Petroleum Corporation Ltd., could help it meet its divestment target set at Rs 80,00 crore for the financial year starting April. Last year, the government sold its 51.11 percent stake in HPCL to ONGC for Rs 36,915 crore, helping it exceed divestment target first time in 14 years.

Possible Debt Implications

While buying government's stake could add more debt on the books of IOC and BPCL, their leverage ratio would still be below the levels considered high by market. IOCL and BPCL had a total debt of close to Rs 32,000 crore and Rs 18,000 crore, respectively, as of December 2017.

IOC and BPCL also own stakes in multiple listed entities which they could consider to fund the acquisition. Their holdings in various listed companies is valued at close to Rs 26,000 crore and Rs 9,500 crore, respectively.

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