ONGC takes a hit on equity investment in HPCL, Indian Oil over fuel subsidy

There has been a sharp fall in the share price of OMCs in the last 2 days after the govt announced that they would have to absorb subsidy on diesel and petrol

Public sector energy major Oil and Natural Gas Corporation (ONGC) has turned out to be the biggest loser in the central government's latest fuel subsidy policy.   

The government's decision to ask state-run oil marketing companies (OMCs) to share part of the subsidy has not only hit the ONGC stock, but it has also affected the value of its investment in companies like Indian Oil, Hindustan Petroleum Corporation (HPCL), and Gail (India). Shares of ONGC declined about 17 per cent this week.

ONGC's investment in HPCL has lost 65 per cent in market value compared to the cost of investment, while its equity investment in Indian Oil Corporation is down 33 per cent compared to the cost of acquisition. The HPCL stock is now trading at Rs 165 apiece, against ONGC's acquisition price of around Rs 474 a share.

ONGC had invested Rs 605.3 billion in these two companies. The investment is now worth Rs 286.5 billion, based on their Thursday's closing share price. Its Rs 3.8 billion investment in Gail (India) remains in green. 

ONGC also has a stake in Mangalore Refinery & Petrochemicals (MRPL) and Petronet LNG, a joint venture with other public sector oil and gas majors. These two companies are not technically PSUs as the government has no direct stake in these companies. The current value of the ONGC stake in MRPL and Petronet LNG remains much higher than its cost of investment. 

There has been a sharp fall in the share price of OMCs in the last two days after the government announced that they would have to absorb subsidy on diesel and petrol to the tune of Rs 1 a litre. Analysts expect the move to nearly halve the profits of OMCs compared to what they reported in the April-June 2018 quarter. 

HPCL became an ONGC subsidiary in January after the latter acquired the government's entire 51.11 per cent stake in it for a consideration of Rs 369.2 billion. In comparison, ONGC is the largest non-promoter shareholder in Indian Oil with a 13.77 per cent stake. 

Analysts don't see any immediate impact on the ONGC finances from the decline in value of its listed investment. "The loss is largely notional as its stake in fellow energy PSUs is strategic rather than financial in nature. The loss will become real only if the company decides to sell shares in the open market, which doesn't look likely in the current environment," says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

Early this year, ONGC had sought the government's approval to sell its stake in Indian Oil and Gail (India) in the open market to repay the loan it took to acquire the HPCL stake. The company wanted to do this to reclaim its historical status of being a debt-free company, besides freeing up resources for its core business of securing oil and gas bearing blocks globally.

In the near-term, ONGC is likely to take a hit on its return on equity due to OMCs' lower profits. "OMCs are likely to take a hit on earnings going forward, which will hit ONGC's dividend income from its investment, impacting its profitability and return ratios," adds Chokkalingam.  

The company earned a dividend income of Rs 37.8 billion in FY18, up from Rs 17 billion a year ago, accounting for 13 per cent of its pre-tax profits of Rs 288.9 billion (on standalone basis) last financial year. This is now under a cloud as HPCL and Indian Oil accounted for the bulk of its dividend income.