Home Business HPCL buy likely to boost ONGC’s EPS by 4-9%

HPCL buy likely to boost ONGC’s EPS by 4-9%


(G.N.S) Dt. 23

New Delhi

Over the past six months, the stock of Oil and Natural Gas Corporation (ONGC) has not been fully able to reflect the rising trend in international crude oil prices due to uncertainty over valuation regarding its acquisition of the government’s stake in Hindustan Petroleum Corp (HPCL). The temporary distortion in the correlation between ONGC’s stock price and crude prices is now expected to rectify in the near term.

Crude prices have shot up 40 per cent in the past six months. This catapulted the stock price of Oil India, a relatively smaller public sector oil producer, by 31 per cent. However, the stock of ONGC, India’s largest oil explorer, gained just over 17 per cent during the period excluding Monday’s increase of 3.3 per cent as analysts found it difficult to compute the impact of the stake purchase in HPCL.

On Saturday, ONGC announced that it would acquire the government’s 51 per cent stake in HPCL for Rs 36,900 crore or Rs 474 per share. This was at a 14 per cent premium to the latter’s closing stock price on Friday, much lower than the street’s anticipation of over 40-50 per cent premium.

ONGC’s stock had earlier underperformed since the street was unable to compute valuation leakage pertaining to the acquisition of controlling stake in HPCL. This raised doubts over ONGC’s fair valuation. Valuation leakage is the discount given — typically 20-30 per cent — to the value of the acquiring company at the time of consolidation with the parent, ONGC in this case.

However, the street’s fear about high degree of valuation leakage may wane owing to the terms of the acquisition. First, the acquisition of HPCL will not result in any open offer. ONGC has received exemption from Sebi since it is a related party transaction between the government and a government company. Thus, it will save money that would have been required to buy shares of minority shareholders of HPCL. Second, the acquisition premium is lower than the market expectations.

Due to these factors, valuation leakage will be lower than expected. With the overhang of HPCL deal a history, ONGC’s stock should reflect higher price realisation in tandem with crude price movement. The fair value of ONGC increases Rs 25-30 per share for every $5 increase in the crude price. Besides, if ONGC sells 13.2 per cent stake in IOCL to fund HPCL’s buy, the valuation leakage will be lower. Also, the acquisition will increase earnings per share by 4-9 per cent next fiscal.

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