Boards of ONGC, MRPL & HPCL yet to mull possibility of HPCL-MRPL merger: HPCL

Both government and ONGC had their independent valuers for HPCL's acquisition, he mentioned.

We need to keep consumer interest in mind while determining marketing margin, said Surana.

On the crude front, he said the crude price is likely to remain in the range of USD 65-70 per barrel.

Talking about GST, he said we will benefit if motor fuel is brought under goods and services tax (GST) as the company will be entitled to input tax credit (ITC).

Company will have a substantial petrochemical portfolio going ahead.

Below is the verbatim transcript of the interview:

Q: You gave us the hint last week when we were talking to you that it should be done this fiscal but are you disappointed a bit with the valuation of HPCL at Rs 473 per share?

A: No there is nothing called disappointment on this. Basically a seller and the buyer have done their due diligence and have come to a conclusion on share pricing and there is an agreement between the seller and buyer to consummate the deal at that price. It is not appropriate for me to comment on the pricing part of it.

Anuj: If the buyer and seller were not the government and it is a listed company at the end of the day. In that case, would Rs 473 have been a fair price for HPCL?

A: As I mentioned both the parties to the transaction who are willing to consummate the deal, they have done their due diligence and must have arrived at the pricing by their own due diligence and the agreement and at this stage commenting or sitting on a judgement on that would not be correct on my part as the CEO of the target company.

Latha: Now since you also have another associate company MRPL in the same fold. Is the next logical step to merge HPCL and MRPL?

A: I think that is a logical thing to do because MRPL is a standalone refinery with no marketing arm and HPCL has got more marketing capacity than the refining capacity. Last year we sold around 35.2 million metric tonne while our refinery capacity is shorter than that. So having MRPL along with us helps us in bridging that gap but apart from that it also brings additional synergies in terms of total crude procurement, in terms of product profile, in terms of logistics management and even the midstream disposals because each refinery have got certain constraints on certain units but having seen on combined optimisation model, we can probably have a better disposal of midstream of individual refineries and create more values of the total molecules which we process. So definitely MRPL is a logical thing to follow. Of course we need to yet to discuss in the respective boards on this issue.

Sonia: Will it happen before the end of the fiscal?

A: We have not decided any timeline because HPCL, MRPL and ONGC boards have to sit together and decide, the formal discussion on that have to start but I believe that if there is a value which can be created, we should try to make an effort to do at the earliest possible.

Varinder: How was this valuation done? Was there one independent valuer, was there two independent valuers because last time your plea was that there should be an independent valuation whenever this deal happens.

A: I understand that both government as well as ONGC had their independent valuers but it will be more appropriate to ask them on this issue but my understanding is there were independent valuers on that.

Anuj: We were talking about it since the Gujarat election - the issue on petrol and diesel. After the election consistently we have seen 5-7 paise increase. Is the marketing margin back to normal because as we speak when last year petrol price was Rs 69.8 in Delhi, today it is Rs 72.5 thereabouts. Is the marketing margin fully back on the table now?

A: I have mentioned earlier also that the way you calculate marketing margins and the way it is need to be calculated is slightly different. You just deduct the refining transfer prices from the market sales prices and then come to the marketing margin but there are number of elements in that.

As far as companies are concerned, they need to evaluate the prices everyday based on international prices, based on the dollar exchange rate and also little bit of their view of the future and based on that the prices are adjusted on daily basis or periodically.

As I mentioned earlier, we need to take all the three factors into consideration that is the company's financial health, the consumer convenience because there is sensitivity to petroleum prices in India whether we like it or not like it and we need to be cautious about it. So as far as marketing margins are concerned, the company's margin will take care of that.

Varinder: I was pleasantly surprised when Chennai Petroleum Corporation reported the gross refinery margins (GRM) over USD 8/bbl in this quarter three, with crude coming down there has been fear that the GRMs will be under pressure will the outlook for the coming quarters from HPCL side is that the GRMs will sustain over USD 7/bbl?

A: No, because we are yet to have our board meeting shortly so I think I won't be able to make any specific comment on this. But one thing is there that high speed diesel (HSD) cracks have been good of late. The Motor Spirit (MS) cracks were slightly subdued. The crude prices were on higher side and that has been doing a bit of a yoyo between USD 70-66/bbl or so, it has rebounded back from USD 70/bbl which I mentioned to you earlier also when the day when crude prices were USD 70/bbl. My view even today is that structurally if we see that USD 65-70/bbl is the range, a sustainable and equilibrium range. You might have noticed that US crude production has gone to 10 million barrels a day which is the third highest after Saudi and Russia, but for the geopolitical tensions let us say something in Libya, Nigeria or some disruption like Libya pipelines or the Forties pipelines I still believe that the crude prices of USD 65-70/bbl is more likely than in the USD 80s per bbl.

Latha: There are two important events coming up; the GST council is going to, for the first time in its meeting actually, take up petro products as a GST item and not a state item. Will that make a world of difference if indeed we were lucky and it was to go through?

A: I won't say world of difference but it will definitely make a difference because MS, HSD, aviation turbine fuel (ATF), crude oil and natural gas are not under GST right now. MS, HSD and ATF constitute around 60-70 percent of production of the oil companies and the market volume also. Now if the output product is not under GST we are not able to claim the Central Value Added Tax (CENVAT) credit on the input material on that and so is the case with a capital input credit as well. Now for a company like us who are having a capex cycle, we will be benefited if MS, HSD, ATF are brought under the GST and in my personal opinion it is the logical step to do. Otherwise we are destroying some value in the value chain.

Sonia: If you can just list down what the synergies would be with respect to the ONGC-HPCL merger whether it is better funding for HPCL's projects or are we looking at fending off competitors as far as auto fuels are concerned? What would be the basic synergies post this merger?

A: If I put three or four points in nutshell the first part is that as I already mentioned to you that it helps us in bridging the marketing and the refining gap if MRPL is integrated with HPCL. It will also bring the optimisation in the crude purchase, the logistics, the midstream disposals as well as the products. The second point is that HPCL is also going to have a substantial petrochemical portfolio going forward and along with MRPL they have got ONGC Mangalore Petrochemicals Ltd (OMPL), ONGC Petro-Additions Ltd (OPAL) etc, it provides us consolidations in the petrochemical space. The third point is which is very obvious that ONGC is an upstream company and they get benefited when the crude cycle is up and we are predominantly a downstream company; we get benefited when the crude cycle is down. So as a group it provides a reasonable hedge in terms of our financial streams and the stability of the group companies.

Further more because both the companies have got their own brand value and their own strength in their respective areas of their operations. Now internationally when you go as an integrated company because of many of the African countries or the developing countries, when you go for acquiring the upstream assets they also look for some efforts or some investment in the downstream side to upgrade their refineries, to prevent their refiners to set-up their downstream markets, to set up the cross country pipelines and HPCL has got specific strength in that. It puts the total proposal in a much better footing where we put a proposal as a combined group which has got the expertise right across the value chain. So, I think that both the companies together can leverage their respective strength to generate more values for their stakeholders. As such both their companies have got their own strength in respective areas of businesses with no clash of interest to that extent. I think that we can leverage it further.

Latha: If it was two private companies merging then you would be getting your raw material actually at cost. You should be getting it at an advantage over BPCL logically speaking because you would be the same company. Do you think a merger is at any point on the cards so that you actually squeeze out these, getting raw material at cost, having common finance departments, common HR departments? Is there a merger sometime down the line?

A: No, just for your information in India the crude produced by company is allocated by the government, the company cannot use it for themselves just like that. So, even when MRPL is a part of the ONGC, MPRL cannot get the ONGC produce crude just like that. So that is the first point. Second point is because both the companies has got different areas of operation different focus areas different skill set, so I don't think that a merger generates more value than what it is today. On the contrary some of the cultural issues because both the companies have got a different historical background and different cultures, therefore, the merger create some collateral issues in terms of the handling of the total entity. By an acquisition rather than merger some of these issues are mitigated so I don't think that merger is on the card or is anticipated or is envisaged or is a desirable item.