Based on HPCL's average market capitalization over the three months to 24 October 2017, the stake to be acquired by ONGC is worth around Rs 35,000 crore.
“Assuming this amount as the purchase...
price, Moody's says that ONGC will likely fund the transaction with incremental borrowings of Rs 25,000 crore, with the remaining amount funded with cash on hand and the liquidation of investments,” the credit ratings agency said in a report.
Moody's also said the planned acquisition of a majority stake in HPCL will cause the etate-run petroleum explorer's leverage to approach the upper limit of its rating. Post acquisition, ONGC's strategic importance to the Indian government will also increase, given that the merger would create the country's first integrated oil & gas company with significant upstream and downstream operations.
"Using ONGC's pro-forma leverage for the fiscal year ended March 2017 — as measured by retained cash flow per unit net debt and debt per unit EBITDA — the acquisition would weaken these results to 33 percent from 68 percent. Nevertheless, the increase in leverage will be partly offset by a qualitative improvement in ONGC's operations, as a vertically integrated company, such that its pro-forma financial metrics could still support its Baa1 rating,” said Vikas Halan, a Moody's Vice President and Senior Credit Officer.
Moody's conclusions are contained in its just-released report "Oil & Gas — India: ONGC's HPCL acquisition will increase leverage and linkages to the government". The analysis is based on the government of India and the board of directors of ONGC having given in-principle approval for ONGC to purchase the government's 51.11% stake in HPCL.
It also says that after acquisition, ONGC's local currency rating will not be rated more than one notch above the Indian sovereign's local currency rating, because of the increase in ONGC's exposure to domestic revenues through HPCL's refining and marketing business.
Moody's said it views the increase in ONGC's leverage from the acquisition as an indication of stronger government influence on the company's financial profile. This level of influence will no longer support the current two-notch gap between the local currency ratings of ONGC and that of the government. And, the rating on ONGC's foreign currency bonds will remain constrained by the Baa2 country ceiling for foreign currency bonds in India.
On HPCL, it says that after the merger, HPCL will continue to be of strategic importance to the government and will form ONGC's largest subsidiary. HPCL will stay strategically important to the government because of its large-scale refining and marketing operations. HPCL will also retain its status as a state-owned entity — based on the government's 69 percent ownership in ONGC — and the government will keep its ability to appoint all HPCL board directors.
Moody's also points out that while HPCL contributes significantly to the government's revenues through direct and indirect taxes, any support to the company, if needed after the merger, will be through ONGC.