ONGC, Oil India May Pay $812 Million to Buy Indian Oil Stake

Oil & Natural Gas Corp. (ONGC), India’s biggest explorer, and Oil India Ltd. (OINL) may buy part of the government’s stake in Indian Oil Corp. (IOCL) for as much as 50 billion rupees ($812 million), helping narrow the budget deficit.

The state-run explorers will probably purchase 10 percent of the oil refiner through block deals in the stock market within a week, Oil Secretary Vivek Rae said in New Delhi today after a meeting of a ministers’ panel. The government holds 78.9 percent in Indian Oil, while ONGC owns 8.77 percent.

The finance ministry is demanding higher dividends from state companies and selling shares as it seeks to narrow the fiscal deficit and prevent a sovereign credit-rating downgrade to junk. The government expects to raise less than half of its target of 400 billion rupees from share sales in the year to March 31. The ministers’ panel last week deferred a decision to sell Indian Oil shares to the public because they are undervalued, Rae said today.

“The government’s using its own companies and doing all it can to meet its budget deficit target,” Gagan Dixit, a Mumbai-based energy analyst at Quant Broking Pvt., said by phone. “Indian Oil’s shares have more value and the potential to rise and ONGC and Oil India can benefit by selling these later.”

Indian Oil gained 1.3 percent to 212.25 rupees at the close in Mumbai today. The shares have dropped 0.9 percent this year, extending a 21 percent decline last year. ONGC declined 1.7 percent to 286.95 rupees and Oil India fell 0.8 percent to 476.05 rupees.

Government’s Kitty

The money raised from the sale will go entirely to the government. Finance Minister Palaniappan Chidambaram reiterated Jan. 15 he will achieve his target of narrowing the fiscal deficit to a six-year low of 4.8 percent this financial year and reducing it by 0.6 percent every year after that. The shortfall in the eight months through November reached 94 percent of the full-year target of 5.4 trillion rupees.

The government will pare its budget deficit to below this year’s target after curbing spending, according to two Finance Ministry officials with direct knowledge of the matter.

India’s credit rating may be cut to junk in 2014 unless the general election due by May leads to a government capable of reviving economic growth, Standard & Poor’s said in November. The rating is currently at the lowest investment grade.

Indian Oil sells diesel, kerosene and cooking gas below the cost of production to curb inflation. The refiner is partly compensated for the losses with cash from the government and discounts on the sale of crude by producers including ONGC and Oil India. The government’s subsidy payments are often delayed resulting in the company reporting losses and higher debt.

Biggest Loss

Indian Oil’s profit dropped 82 percent to 16.8 billion rupees in the quarter ended Sept. 30. In the three months ended June 30, 2012, it reported a loss of 224.5 billion rupees, the highest by a company in India.

ONGC had 195.6 billion rupees of cash and equivalents and Oil India 124.9 billion rupees as of Sept. 30, according to data compiled by Bloomberg. The discounts the two explorers give on their crude oil sales to state-run refiners are reducing their cash flows.

ONGC’s cash from operations dropped to a three-year low of 362 billion rupees last financial year, according to data compiled by Bloomberg.

To contact the reporters on this story: Siddhartha Singh in New Delhi at ssingh283@bloomberg.net; Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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