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HPCL Assets Valued at Over 70% of its Market Capitalisation

A new report has valued assets of Hindustan Petroleum (HPCL) at Rs 1140 billion — nearly 70 percent premium to its current market capitalization of around Rs 660 billion. The higher valuation of HPCL’s assets by JM Financial, if accepted by the government, would mean a higher outgo for ONGC. The JM Financial report has been submitted to the government, which had mandated the Mumbai firm to advise it on the transaction.

 

ONGC was planning to spend around Rs 330 billion to acquire the government’s 51 percent stake in HPCL, based on the latter’s current market capitalization. Going by JM Financial valuation, ONGC’s acquisition bill could shoot up to nearly Rs 550 billion, forcing it to either sell its stake in other public sector oil and gas to raise capital or make fresh borrowing. But both ONGC and government are expected to negotiate a price which is near to its current market price, said a source.

 

HPCL’s enterprise value was at around Rs 750 billion, taking into account its borrowings and cash and equivalents, at the end of March. SBI Caps, appointed by ONGC, had also prepared a report based on market regulator Securities and Exchange Board of India’s formula that takes into account HPCL’s share price.

 

Currently, ONGC is debt-free on a stand-alone basis and was sitting on cash and equivalent worth around Rs 140 billion at the end of March. ONGC’s equity investments in other energy companies, including Indian Oil, Gail, Petronet LNG, and MRPL, is valued at around Rs 505 billion. Analysts said since the valuation reports of both consultants have a big gap, ONGC and the government would have to negotiate the final price. “Fixed assets like land, plant, and machinery have to be valued at the current market price, investments in subsidiaries, inventories will be taken into account while preparing the report,” said Mahendra Chhajed of Chhajed & Doshi. “Intangible assets like brand, logistic network are also taken into account.”

 

The government is planning to plug gaps in fiscal deficit with the stake sale. But experts say with a higher valuation of HPCL, the government would lose whatever it makes through the sale via lower ONGC share price. “When the market regulator already gives a valuation formula, why should ONGC pay a higher price to acquire an asset and hurt its shareholders? Besides, a higher outgo will dent ONGC stock price hurting government, which is its biggest shareholder,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

 

ONGC and JM Financial did not comment on the valuation report.

 

To fund the transaction, ONGC plans to sell its 13.5 percent stake in Indian Oil Corporation and a 5 percent stake in pipeline firm GAIL. After the acquisition by ONGC, would remain a public sector unit with a separate board and brand identity.

 

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