ONGC’s planned acquisition of a majority stake in refiner HPCL will create India’s first integrated oil and gas company but will cause the state-owned firm’s leverage to approach the upper limit of its rating, Moody’s Investors Service said today.

The government’s selling its 51.11 per cent stake in Hindustan Petroleum Corp Ltd (HPCL) to Oil and Natural Gas Corp (ONGC) will help it achieve the disinvestment target for the current fiscal. “The transaction also allows the government to monetise its HPCL ownership without losing ultimate control of the company,” Moody’s said.

Based on HPCL’s average market capitalisation over last three months, the government’s stake is worth about Rs 35,000 crore, which ONGC may fund through borrowings of Rs 25,000 crore and the rest with cash on hand and the liquidation of investments.

Moody’s said that post acquisition, it will assess ONGC’s credit profile after full consolidation of HPCL. “Post acquisition, ONGC’s local currency rating will be a maximum of one notch higher than the sovereign’s local currency rating. This will be driven by an increase in ONGC’s exposure to domestic revenues through the refining and marketing business of HPCL,” it said in a note.

Also, the increase in ONGC’s leverage from the acquisition will be seen as an indication of stronger government influence on the company’s financial profile, it said, adding that the rating on foreign currency bonds will remain constrained by the Baa2 country ceiling for foreign currency bonds in India.

HPCL, it said, will remain strategically important to the government given its large-scale refining and marketing operations. It will continue to be a state-owned entity and the government retains its ability to appoint all board directors.

The acquisition will create India’s first integrated oil and gas company but benefits will be limited, Moody’s said. “Although the contribution of the downstream segment will increase and will result in lower volatility in earnings, the upstream segment will still account for 70 per cent of EBITDA.

“There will be some synergies but the benefits will be limited to the downstream segment, where there is an overlap between ONGC and HPCL’s operations,” it said.

ONGC’s refinery and petrochemical operations will be able to use HPCL’s established marketing infrastructure, which will result in lower costs in those business segments.

Stating that ONGC’s financial metrics will deteriorate post acquisition, Moody’s said the state-owned firm’s pro-forma leverage, as measured by retained cash flow (RCF)/net debt, would weaken to 33 per cent from 68 per cent and debt/ EBITDA will increase to 1.9x from 1.1x.

This leverage increase will be partly offset by a qualitative improvement in ONGC’s business position as a vertically integrated company. “The pro-forma financial metrics of ONGC could still support its Baa1 rating,” it said.

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