Does It Make Economic Sense for IOC and Gail India to Invest in Adani’s LNG Terminals?

While investors have given a thumbs-down to the deals as they would add to the PSUs' loan burden, they will likely help the heavily-indebted Adani group secure bank loans and make future investments.

New Delhi: Over the last year, state-owned Indian Oil Corporation (IOC) and Gail India have decided to pick up stakes in Adani group-promoted LNG terminals in Odisha and Gujarat.

By participating in these projects as financial investors rather than promoters, the PSUs will help the heavily-indebted Adani group to make further investments. However, in the process they will have to take on more loans on their balance sheets, which could increase their leverage and crimp future investment capacity, say analysts.

A former IOC chairman, who spoke to The Wire, said, “Why should a PSU oil company take such a big stake in a private sector project without having any controlling interest. If the objective is to take a financial stake then a small investment would do. But how can a PSU justify such a big stake thus indirectly helping fund the private sector company which is already highly leveraged with the banks?”

The Adani group’s outstanding debts have shot up to Rs 72,000 crore, the highest for any corporate group in the country. Group company Adani Harbour Services and Adani Petronet (Dahej) Port are already facing bankruptcy proceedings in Ahmedabad bench of the NCLT.

Rating agency Crisil recently has classified Adani Power’s Rs 6559 crore loan facility as “non-cooperative” which means investors, lenders and all other market participants should exercise caution while using the rating.

Such ratings are issued when company management does not provide requisite information, Crisil has clarified.

The former chairman, who declined to be identified, also dismissed the argument that IOC needed to invest to get access to the re-gasification facility. He said that all LNG importers can use the facility, irrespective of whether they have invested in it or not.

He emphatically added that IOC’s participation in these projects would help the Adani group secure bank loans in addition to equity while adding to the PSU’s loan burden. “Besides, without a controlling stake IOC will not be able to take depreciation benefits also”.

State-owned India Oil Corporation (IOC) and Gail India will together pick up 49% stake in the Adani group-sponsored Rs 6,000 crore Dhamra LNG terminal in Odisha. The private player will have 49% stake while the balance 2% will be held by financial institutions.

IOC alone has also taken up a 50% stake in GSPC LNG’s Rs 5,040-crore-Mundra LNG terminal. GSPC LNG is a joint venture between GSPC and the Adani Group.

It looks like investors of IOC and Gail too did not give a thumbs-up to the PSUs’ stated plans to pick up stakes in these LNG projects.

NSE data show that on days that followed announcement of plans to pick up stakes in Adani’s Dhamra project by IOC and Gail on September 2 last year, their stock prices fell. For example, IOC and Gail respectively lost 2% and 0.78% of their stock value between September 2 (the day the announcement was made) and September 8, while Nifty 100 saw a 2.12% gain.

Movement in IOC, Gail share prices following announcement of Dhamra LNG project on September 2, 2016

Day Movement in Nifty 100 % change IOC share price % change Gail share price % change
September 2, 2016 9022.25 2.19 286.43 (-2) 295.76 (-0.78)
September 6 9160.45 286.63 301.8
September 7 9142.55 283.25 297.38
September 8 9177.90 281.7 291.68

Source: NSE

When the IOC board approved the company’s investment proposal for buying 50% stakes in the Mundra LNG project on August 5 this year, its share price fell by 4.84% over the following week (the announcement was made after closing of trading on Friday). In comparison, the Nifty index lost only 2.3% of its value during the same period.

The under-construction Mundra LNG terminal will have a five million tonne per annum (mtpa) liquefaction capacity and will cost Rs 5,040 crore.

While IOC has not given the acquisition cost, an official did indicate that roughly 30% of the project cost is equity and the PSU would pay for half of it. A final figure would be arrived at only after the valuation exercise is completed, the official said.

Day Movement in Nifty 100 % change IOC share price % change
August 07, 2017 10,057.40 (-2.3%) 431.20 (-4.84)
August 08 9,978.55 413.25
August 09 9,908.05 412.75
August 10 9,820.25 410.30

Source: NSE

The project is expected to be ready by the end of this fiscal.

The share of natural gas in India’s primary energy consumption remains relatively low (just 6.5% in 2015-16 compared to the global average of over 23%). However, the government has envisaged raising this share to 15% over the next few years.

With natural gas demand outpacing domestic availability, the country is expected to rely heavily on LNG imports. IOC, the second largest player in India’s gas market, has made significant investment in re-gasification infrastructure to harness potential growth in gas demand.

Gas imported at the Dhamra terminal would feed IOC’s three oil refineries at Barauni in Bihar, Haldia in West Bengal and Paradip in Odisha. Also, it will supply feedstock to fertiliser plants at Barauni, Sindri and Gorakhpur.

As per official estimates, together these projects will bring investment of Rs 51,000 crore to the eastern part of the country. The Jagdishpur-Dhamra pipeline entails investment of Rs 12,940 crore, city gas distribution projects Rs 6,000 crore and the revival of state-owned fertiliser plants at Gorakhpur, Barauni, Sindri and Talcher will attract investment of Rs 26,000 crore. The LNG terminal is expected to be completed by 2020-21.