The ONGC share buyback plan will only swell Oil and Natural Gas Corp. Ltd’s overall indebtedness at a time when the state-run explorer has also outlined a sizeable capital expenditure plan. The company said on Thursday it will buy back shares worth 4,022 crore at a price of 159 each. This is a premium of 7% over ONGC’s prevailing share price at the time of the announcement. The company aims to buy nearly 2% of its shares.

The government stands to benefit most from this buyback programme, considering it owns 67.5% of ONGC. This, and similar other share buyback programmes, will help the government meet the fiscal deficit target for this financial year. ONGC’s cash has been tapped by the government in the past as well. Earlier this year, ONGC purchased the government’s stake in Hindustan Petroleum Corp. Ltd (HPCL) for about 37,000 crore. ONGC had to take a debt of 25,000 crore to fund this acquisition.

The fact that ONGC’s debt will only increase due to the buyback programme isn’t good news for investors.

What’s more, this comes at a time when the company has a sizable capex plan. In its annual report for financial year 2018, ONGC had said the capex for FY19 would be about 32,000 crore.

In any case, investors have seen value erosion in the stock.

Fears that ONGC may have to share subsidy burden of the oil sector has led to underperformance. Sure, with crude oil prices having corrected from their highs in October, there should be some relief on the overall under-recoveries of the sector. But the picture isn’t all that rosy.

Liquefied petroleum gas/ kerosene under-recoveries may have eased, but may still rise 45% year-on-year to 37,000 crore in financial year 2019, said analysts from Jefferies India Pvt. Ltd in a 17 December report. With fiscal space constrained, we assume that upstream state-run enterprises take about a third of the burden, added the broker.

The faint silver lining for investors is that the underperformance of the stock has rendered valuations attractive. Currently, ONGC shares trade at about six times estimated earnings for the next financial year, based on data from Bloomberg. While that may mean that downside is limited, there are hardly triggers for outperformance in sight either.

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