Indian Oil’s Debt May Surge If It Buys Government Stake In BPCL
An IOCL-BPCL merger can potentially increase Indian Oil’s debt the most since its listing.
The government is looking to meet its divestment target by selling stake in India's second-largest oil marketer, the Business Standard newspaper reported citing senior government officials privy to the development. And Indian Oil Corporation Ltd., the largest oil refiner and marketer, could be a probable buyer for the government’s 53 percent stake in Bharat Petroleum Corporation Ltd.
But an IOCL-BPCL merger could increase Indian Oil’s debt the most since its listing, data compiled by BloombergQuint show. Government stake in BPCL was worth nearly Rs 41,049 crore in the quarter ended June 30, while Indian Oil’s net debt was around Rs 72,227 crore.
IOCL will have to borrow funds or raise equity from the markets to fund this acquisition as it has planned a capital expenditure of Rs 25,084 crore, has negligible cash balance and has also never generated enough free cash flow in the past to fund such acquisitions, according to data compiled by BloombergQuint.
Analysts believe IOCL could do without the BPCL acquisition.
“Given Indian Oil’s financial condition and the fact that it’s entering a strong capital expenditure cycle, such an acquisition could have a detrimental impact on the company,” said Mayuresh Joshi, head-portfolio management service at Angel Broking. “The acquisition would add just two refineries to Indian Oil’s portfolio which in itself has a large refining capacity without any commensurate synergies. Indian Oil can spend that money somewhere else.”
Agreed Avinash Gorakshakar, head of research at Joindre Capital Services. “Given Indian Oil’s low cash balance and major capital expenditure ahead, this acquisition will lead to borrowings which would have a negative impact on (its) financials,” he told BloombergQuint. “The acquisition would just increase the size of balance sheet and not the business environment,” he said, adding: “There could be limited synergies by this acquisition but increase in finance cost would offset that.”
Moreover, if the IOCL-BPCL merger happens at a premium—like in the case of Oil and Natural Gas Corporation Ltd.’s acquisition of Hindustan Petroleum Corporation Ltd. last year—it could be an additional drag on Indian Oil’s balance sheet. ONGC bought government’s 51 percent stake in HPCL at Rs 474 per share—a premium of 14 percent.
However, since the acquisition, both the companies are yet to see significant financial synergies, with HPCL trading at a discount of over 45 percent to its acquisition price. ONGC’s proposed merger between Mangalore Refinery and Petrochemicals Ltd. and HPCL too is yet to take place.
IOCL can also divest its stake in companies like ONGC, Petronet LNG Ltd., Chennai Petroleum Corporation Ltd., GAIL (India) Ltd. and Oil India Ltd. to fund its acquisition. The value of its stake in these companies is close to Rs 20,500 crore. However, a stake sale is less likely as ONGC chose to raise funds for acquisitions via debt.
Indian Oil has a refining capacity of 70 million metric tonnes per annum and petrochemical production capacity of 3.15 MMTPA. On the other hand, BPCL has refining capacity of 31 MMTPA and is looking to diversify into petrochemical products.