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The true story behind HPCL's stake sale

By Sudhir Bisht
September 14, 2017 08:42 IST
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The government shouldn't hide behind the veil of making a domestic giant out of the HPCL-ONGC deal, rather it should just say it needs cash from this divestment, says Sudhir Bisht.

I am not surprised by the Government of India's recent decision to sell the 51.11 per cent stake it owns in Hindustan Petroleum Corporation Limited to the Oil & Natural Gas Corporation (ONGC).

I am surprised that my media friends who cover the oil and gas sector have not scrutinised it with any degree of earnestness.


My sense is that the government, by asking one of its public sector undertakings to buy a 51.11 per cent stake in another PSU, is just using another route to raise revenue.

The deal may benefit neither HPCL or ONGC.

It is not for the first time that one oil PSU is carrying out a 'strategic' buying exercise into another oil PSU.

The Manmohan Singh government had done a similar rigmarole when ONGC and Oil India Limited (OIL) had bought a 10 per cent stake in the Indian Oil Corporation (IOC).

There is nothing illegal about this. The Government of India has a controlling stake in both ONGC and HPCL. The President of India owns 8,737,600,510 shares in ONGC.

The Government of India through the President owns 68.07 per cent of ONGC.

The Life Insurance Corporation of India (LIC), Indian Oil and the Gas Authority of India Limited (GAIL) own 8.98 per cent, 7.69 per cent and 2.40 per cent of ONGC respectively.

So the Government of India virtually controls 87 per cent of ONGC and it has absolute right to invest in any legal transaction.

Similarly, the President of India holds 519,230,250 shares of HPCL and this represents a 51.11 per cent of HPCL's total shares.

So there is nothing wrong with the government selling its 51 per cent stake in HPCL to ONGC.

And I also concede that the Government of India needs more and more money with each passing day.

Money is needed for one rank one pension, defence programmes, farmers' welfare programmes and many of its developmental programmes that need more funds.

So if there is a need for the government to collect more revenue and if the manner in which it is collecting the revenue is fully legal, what are my objections to the deal?

The following:

The need for cash is even more pronounced now after the Reserve Bank of India has announced that it would pay half the dividend of what it paid to the Government of India last time around.

However, the government should not hide behind the veil of making a domestic giant out of this HPCL-ONGC deal.

The government should just say that it needs cash from this divestment exercise, but is unwilling to let go an entity as precious as HPCL.

The plainspeak will be appreciated, just as the plainspeak of 'give it up' on LPG subsidy was appreciated.

If the government wanted to make a giant company post the HPCL-ONGC deal, then that is not going to happen at all.

It is a well known fact that a company is called a giant company or a pygmy based upon market capitalisation.

Some analysts also consider sales turnover, assets and profits as outward manifestations of the bigness or smallness of a company.

But if ONGC is just buying a 51.11 per cent government stake and not merging HPCL with itself, then this means that both companies will continue to be listed separately on the stock exchanges.The market capitalisation thus will not get impacted as the shares would be listed separately.

How will ONGC buying 51.11 per cent of the government's stake in HPCL lead to the making of a domestic giant?

The sales turnover and profit-before-tax (PBT) of Indian PSUs is captured in the table below:

Name of oil PSUs Revenue from operations
in INR (crore) as per
company's audited
balance sheet (s)
Revenue from operations
in billion USD assuming
($1 = INR 65)
Profit before tax
(PBT in INR (crore)
as per company's
audited balance
sheet (s)

PBT in billion
USD assuming
($1=INR 65)

PBT as percentage
of revenue

Indian Oil Corporation

4,45,372 68.5 26,321 4.0 5.9
Bharat Petroleum Corporation 2,43,747 37.5 12,756 2.0 5.2
Hindustan Petroleum Corporation 2,13,904 32.9 8,878 1.4 4.2
Oil and Natural Gas Corporation 77,907 12.0 25,215 3.9 32.4
GAIL 49,236 7.6 5,757 0.9 11.7
Total 10,30.166 158.5 78,927 12.2 7.7

                                              Source: Audited P&L statements of above companies

If the Government of India is indeed keen on making one Indian company that could compete with some of the biggest oil companies in the world, it could have merged all the public sector oil companies into one single entity.

This would have resulted in a $158 billion company that could have looked comparable to, say, Royal Dutch Shell that has a sales turnover of nearly $230 billion.

The merged company, resulting from the merger of IOC, BPCL, HPCL, ONGC and GAIL, would have been comparable to BP (formerly British Petroleum) that has a turnover of about $180 billion.

But clearly, the Government of India by making ONGC buy a nearly 51 per cent stake in HPCL has no intention of making the HPCL-ONGC a large revenue company because the two companies are going to operate as two independent companies.

I also believe that it is about time the professional advisors to the National Democratic Alliance government on oil and gas stopped talking about 'integrated' oil companies.

While it is a fact that companies like ExxonMobil, Shell and BP operate in upstream (exploration and production of crude oil), midstream (refining of crude oil) and downstream (and this includes distribution and retail of refined products) segments, it is also true that being involved in all three segments does not always lead to any kind of competitive advantage.

Exploration and production of oil and gas have no shared synergies with, say, retailing petrol and diesel across a country.

If we take the case of ExxonMobil in Nigeria, the most populous nation in Africa, we will find out that ExxonMobil, which has a large stake in upstream activities in that country, has sold majority stake of its petrol stations business that operated under its company Mobil Oil Nigeria PLC to a Nigerian company called NIPCO Plc.

Similarly, the erstwhile ESSO Petroleum's retail business arm had closed its fuel stations after selling all the fuel outlets to a Nigerian company called OANDO Plc a long time ago and Shell had exited the retail business long time ago and all its fuel stations were acquired by Conoil PLC, another giant company with 100 per cent Nigerian ownership.

I am giving the above examples to support my point that in a particular country, an oil company may find the upstream business very interesting but may find the midstream and downstream business very uninspiring.

Even in India, Reliance Petroleum had mothballed most of its stations when it found that their retail stations could not have competed with the PSUs, unless the subsidised pricing regime was extended to the private sector refiners.

Reliance and Essar have begun retail activities only after the free pricing regime came into being in India in the last few months.

I would also mention here that fuel retail has undergone a sea change in terms of the way business is conducted across fuel courts.

An American enterprise by the name Pilot Flying J is among the biggest sellers of diesel in USA and Canada in the retail format.

The company does not own any refinery but is the leading highway diesel sellers. It attracts truckers due to its value-for-money loyalty programmes and provides one of the most affordable, clean resting, eating and parking spaces for the drivers.

The mandarins of the government would do well to note that biggest sellers of airline tickets are not the companies that own the airlines, but Web sites that market the seats aggressively.

Similarly, owning oil wells has no bearing upon a company's petrol pumps' retail business any longer.

My recommendation to the government would be to privatise at least one or two PSU oil retailing companies.

This will bring it windfall gains and will provide them with the cash to give its pro-poor programmes a push.

You need a minimum of Rs 2 crore to build a world class petrol station.

Add to it the fact that the land for constructing such petrol pumps is very difficult to buy in view of the stringent National Highway Authority of India norms for setting up retail outlets.

HPCL has close to 14,500 retail outlets across India.

A private sector company will not value its stations at less than Rs 3 crore per station and would be willing to pay a price of Rs 43,500 crore just to gain control over the HPCL retail network.

This is far in excess of what ONGC would pay the government for a controlling stake in HPCL. The government can still sell the refineries, pipelines and terminals of HPCL to IOC.

I hope someone in the department of pertroleum will agree with me!

Sudhir Bisht, author and columnist, tweets at @sudhir_bisht

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