Sector Update | 18 July 2017
Oil & Gas
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Mega-merger mania gripped by uncertainties
No major improvement in value proposition expected
Since the Indian government’s announcement of creation of mega oil & gas majors
in its Union Budget 2017, the market has been rife with speculation over potential
mergers among the public sector companies (ONGC, IOCL, BPCL, HPCL, Oil India
and GAIL). The stock prices have been volatile amid limited details provided by the
government and the lack of possible synergies in the talked mergers. Starting from
ONGC-HPCL merger, the news articles
1
moved to the possible IOCL-Oil India and
then to BPCL-GAIL mergers. However, nothing has been clarified by the
government about this, and the least of all, valuation.
Refer to our report
on Oil & Gas, February 2017
ONGC-HPCL merger: Many questions remain unanswered
ONGC is said to be in talks to acquire the government’s stake in HPCL. Many
questions remain unanswered, though, including (i) MRPL-HPCL and OMPL-MRPL
prior to that, (ii) if HPCL will remain a listed subsidiary or be subsumed and (ii)
whether there would be an open offer. Additionally, uncertainty on valuation
remains. We do not see any synergy leading to cost reduction or improved value
proposition via the merger, except that it will give some hedge toward oil price
volatility. We estimate that, at market price, if ONGC were to acquire the
government’s 51% stake in HPCL at 8% interest cost, it would increase ONGC’s FY18
EPS by 5%.
IOCL-Oil India merger: No avenues for improved value proposition
The Indian government has 66.13% stake in Oil India. IOCL has presence in 13
domestic blocks and 10 international blocks. Merger with Oil India could give it
some expertise in E&P. However, again, there are no avenues for cost reduction or
improved value proposition. Oil India does not even provide a significant hedge
against oil price volatility to IOCL. We estimate that, at market price, if IOCL were to
acquire the government’s 66.13% stake in Oil India at 8% interest cost, it would
increase IOCL’s FY18 EPS by 4%.
1
BPCL-GAIL merger: Not expected to result in much cost saving
The government has 54.88% stake in GAIL. BPCL and GAIL are together in several
CGDs like IGL, MNGL and CUGL. However, their merger would not really result in
much reduction in cost as these companies are managed more or less
independently. GAIL has vast experience in gas sourcing and distribution, which
could benefit BPCL. However, it would also expose BPCL to the risk of 5.8mmtpa US
shale contracts that GAIL has signed. We estimate that, at market price, if BPCL were
to buy the government’s 54.88% stake, it would increase BPCL’s EPS by 8%.
http://economictimes.indiatimes
.com/industry/energy/oil-gas/ioc-
oil-india-merger-on-the-
cards/articleshow/59637083.cms
http://www.financialexpress.com
/industry/not-just-1-india-set-to-
get-3-mega-oil-giants-
soon/767550/
Swarnendu Bhushan
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Abhinil Dahiwale
(Abhinil.Dahiwale@motilaloswal.com); +91 22 3980 4309
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Oil & Gas
Exhibit 1: Valuation summary
Company
Oil & Gas
BPCL
GAIL (India)
HPCL
IOCL
Oil India
ONGC
Recommend
ation
Neutral
Sell
Buy
Neutral
Buy
Buy
Market
Cap
(US$ B) FY16
14.3
10.1
9.0
28.2
3.4
31.9
41.1
13.2
24.4
20.8
28.7
13.6
Div.
Yield
FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17
EPS (INR)
P/E (x)
EV/EBITDA (x)
ROE (%)
48.3
22.6
40.7
43.0
19.3
16.4
36.7
26.3
29.5
36.0
27.9
17.4
43.5
29.8
32.6
40.0
30.1
19.7
9.7
16.8
9.1
8.6
14.3
9.8
12.8
14.4
12.5
10.3
9.9
9.3
10.8
12.7
11.3
9.3
9.2
8.2
8.5
11.4
6.0
5.8
8.7
3.4
9.9
9.2
7.1
5.5
9.2
2.7
8.7
8.4
6.8
4.9
8.2
2.3
32.4
9.6
32.4
21.2
5.7
10.1
21.7
11.3
20.6
15.8
7.5
9.9
22.3
11.8
20.0
15.8
7.8
10.8
4.6
1.9
5.4
5.2
5.1
4.7
Source: Company, MOSL
Learning from the past
Valuation of stakes is a challenge. However, a strategic sale could fetch higher
valuation, as seen in the past. We take a dig at few instances as mentioned by
DIPAM on its website. However, in each of these, bids were invited from interested
parties.
Exhibit 2: Few strategic disinvestment in the past
n
n
n
n
n
GoI had 100% stake prior to 1997
Disinvestment Commission recommended divestment of 51% stake to strategic
partner, along with transfer of management control
Jardine Fleming appointed as advisor
51% sold to Sterlite Industries, the highest bidder at INR5.5b in Mar'2001
Mired in controversies on valuation, although all three writs squashed in
Supreme Court
2001: GoI decided to bring down its equity to 26% through strategic sale and
other means
Initially 14 domestic and international entities submitted EoI
Ultimately, only two submitted technical and financial bids. One was found
invalid due to lack of bank guarantee
Evaluation Committee decided floor price of INR1,088m for 51% stake
Tata Sons acquired 51% stake at INR1,520m
2001: GoI decided to divest 26% stake
BNP Paribas was appointed as advisor
Price bids were invited from five Qualified Interested Parties: Glencore, Binani,
Indo-Gulf, Sterlite and Metdist
Reserve price was fixed at INR3.5b for 26% stake
Sterlite's bid of INR4.45b was finally accepted in 2002
UBS Warburg fixed reserve price at INR8.45b for 26% stake
Three bids were submitted: Reliance Petroinvestments at INR14.9b, IOCL at
INR8.3b and Nirma Chemicals at INR7.1b
Reliance acquired stake in 2002
Source: DIPAM, MOSL
n
n
n
n
n
n
n
n
n
n
n
n
n
18 July 2017
2

Oil & Gas
How could strategic sale happen now?
In the mergers being talked about, the government appears to have already fixed as
to who is going to acquire the stake. In such a case, the valuation, even by an
independent party, would be questionable. One way could be to partially offload
stake by inviting bids, and divest the rest to the PSUs. This could definitely fetch a
higher price. For example, stake in ~24% market share in petroleum sales in the
country may attract foreign players/private domestic players, which may want to
acquire a pie of the growing Indian fuel retail segment.
One way could be to
partially offload stake by
inviting bids, and divest the
rest to the PSUs
A confusing scenario for investors
A merger of ONGC and HPCL would definitely be beneficial for ONGC as it would
improve its return ratios. However, valuation would be a key concern. If HPCL
remains a listed subsidiary, then it would not affect its valuation; however, for
valuing HPCL, one would apply holding company discount, a negative for ONGC.
IOCL and Oil India merger does not throw major concern, as size of Oil India is small.
However, valuation again could be a concern. Merger of GAIL and BPCL could dilute
BPCL’s return ratios. Strategically, the merger would take BPCL’s expertise in gas
sourcing, distribution and sales to a new level. However, valuation again could be a
cause of worry.
Exhibit 3: Impact on EPS if acquisitions happen at market price
Scenario 1: Market price
Potential
acquirers
ONGC
IOCL
BPCL
Potential
acquisition
targets
HPCL
Oil India
GAIL
Govt's
stake
(%)
51.11
66.13
54.88
Increase in
Market Acquisition Rise in debt if Rise in interest Decrease
PAT due to
cap
cost
fully funded
cost at 8%
in PAT
stake purchase
(INRb)
(INRb) through debt
interest
(INRb)
(INRb)
562
287
287
23
15
27
207
137
137
11
7
15
643
353
353
28
19
24
Net
% increase
increase
in PAT
in PAT
(INRb)
(INRb)
12
5
8
4
6
8
Source: MOSL
Exhibit 4: Impact on EPS if acquisitions happen at 50% premium to market price
Potential
acquirers
ONGC
IOCL
BPCL
Potential
acquisition
targets
HPCL
Oil India
GAIL
Govt's
stake
(%)
51.11
66.13
54.88
Market Acquisition
cap
cost
(INRb)
(INRb)
562
207
643
431
205
529
Scenario 2: 50% premium to market price
Increase in
Rise in debt if Rise in interest Decrease
PAT due to
fully funded
cost at 8%
in PAT
stake purchase
through debt
interest
(INRb)
(INRb)
431
34
23
27
205
16
11
15
529
42
28
24
Net
% increase
increase
in PAT
in PAT
(INRb)
(INRb)
5
2
4
2
(4)
(5)
Source: MOSL
Exhibit 5: Financials post ONGC+HPCL merger
ONGC
223,406
9.9
8.7
FY18
HPCL
53,677
23.8
14.6
ONGC+HPCL
250,840
10.6
9.3
Source: Company, MOSL
PAT (INRb)
ROE (%)
ROCE (%)
18 July 2017
3

Oil & Gas
Exhibit 6: Financials post IOCL+Oil India merger
IOCL
170,608
15.8
11.4
FY18
Oil India
22,354
7.5
5.9
IOCL+Oil India
185,390
14.6
10.8
Source: Company, MOSL
PAT (INRb)
ROE (%)
ROCE (%)
Exhibit 7: Financials post BPCL+GAIL merger
BPCL
72,129
21.7
11.7
FY18
GAIL
44,541
11.3
9.7
BPCL+GAIL
96,574
17.6
11.3
Source: Company, MOSL
PAT (INRb)
ROE (%)
ROCE (%)
18 July 2017
4

Oil & Gas
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18 July 2017
5

Oil & Gas
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