Shareholders of Oil and Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation (HPCL) reacted to the developments around the deal involving two companies’ merger.
ONGC gained over 6 percent intraday, while HPCL lost around 4 percent intraday on Monday. Investors have raised concerns over the valuation that HPCL has received in the deal.
Over the weekend, ONGC announced that it will pay Rs 36,915 crore for a 51.11 percent stake in HPCL. ONGC will pay Rs 473.97 per share and will complete the acquisition of government’s stake in HPCL by January end.
A purchase by ONGC provides the government an opportunity to offload its stake in HPCL without a huge dilution in control, as the government holds a majority stake in ONGC too.
The deal was a part of the government’s effort to create an integrated energy behemoth and also to meet the hefty Rs 72,500-crore disinvestment target it had budgeted for this fiscal.
The global research firm said that the acquisition price for ONGC was in line with its targets. For ONGC, it would be 9% EPS accretion, while balance sheet will be comfortable, it said. An outperform rating has been reiterated on the stock.
Meanwhile, for HPCL, reference valuation is at a 14% premium to last close. But, HPCL bulls will be disappointed as price is below Rs 650/ share valuation. It has maintained a neutral call on the stock.
Further, it added that ONGC is its top large cap E&P play in Asia.
Jefferies highlighted that ONGC’s EPS may rise 4-6% leaving valuations at just 8.5x FY19e P/E. it has retained buy on ONGC and underperform on HPCL. It pegs the latter’s March 2018 FV at Rs 349, 27% lower than what ONGC is paying. Earnings remain central for ONGC’s share price outlook.
Brokerage: IDFC Securities
The brokerage said that lower premium a key positive for ONGC. It added that price would set fair value benchmark. Further, it believes that the transaction will further spur consolidation in the space. It expects IOCL to merge its subsidiary (CPCL), and/or buy government stake in Oil India.
The brokerage house believes that the deal is EPS accretive for ONGC but leverage to increase. It expects the firm to see some near-term pressure, unless it decides to monetise stake in IOCL.
The broking firm expects the deal to be entirely funded through debt. Consolidated debt/equity ratio to increase to only 0.4x vs 0.2x. Expect no merger or operational synergies as HPCL will be an independent entity, it said, adding that acquisition to merely contribute as investment value.
ONGC has gained over 9 percent in the past one month, while its three-day gain stood at 3 percent. At 10:28 hrs Oil and Natural Gas Corporation was quoting at Rs 201.65, up Rs 8.05, or 4.16 percent, on the BSE.
Meanwhile, HPCL has fallen close to 8 percent in the past one month, while its three-day loss stands at 4 percent. At 10:29 hrs Hindustan Petroleum Corporation was quoting at Rs 402.80, down Rs 13.75, or 3.30 percent, on the BSE.moneycontrol