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Published on 31/01/2018 3:35:25 PM | Source: Dion Global Solutions Ltd

Ind-Ra affirms credit neutral for HPCL post-merger with ONGC

Oil and Natural Gas Corporation Ltd’s (ONGC) acquisition of Hindustan Petroleum Corporation Limited (HPCL; ‘IND AAA’/Stable) by FYE18 would be credit neutral for the ratings of HPCL, believes India Ratings and Research (Ind-Ra). ONGC, which is 68.94 per cent-held by the government of India (GoI), will acquire the GoI’s 51.11 per cent stake in HPCL for INR369.2 billion. Thus, the GoI will indirectly own 35.23 per cent in HPCL. Despite the change in ownership, HPCL will continue to operate as a separate entity with a strong brand.

Its strategic importance to the GoI is likely to remain intact, given the company’s role as the GoI’s extended arm for fuel policy implementation, said the rating agency. Meanwhile, the acquisition of HPCL is likely to result in additional borrowings for ONGC. In Ind-Ra’s opinion, ONGC is likely to fund the acquisition by end-January 2018 and could use one or more of the three sources for funding: fresh debt, cash and cash equivalents, and monetisation of its stake in entities such as GAIL (India) Limited (‘IND AAA’/Stable), Indian Oil Corporation Limited (‘IND AAA’/Stable) and Petronet LNG Ltd (‘IND AAA’/Stable/‘IND A1+’).

The combined value of its stake in the three entities is about INR344 billion. Ind-Ra expects ONGC’s consolidated net leverage to remain comfortable at 1.3x-1.5x on a pro forma basis in FY19 (FY17: 0.8x), depending on the funding mix.