Shares of Oil and Natural Gas Corp Ltd <ONGC.NS> jumped as much as 6.3 percent on Monday to their highest in nearly a year after the explorer said it would buy a majority stake in state-run refiner Hindustan Petroleum Corp Ltd <HPCL.NS>.
ONGC, India's biggest explorer, said on Saturday it will pay 369 billion rupees ($5.77 billion) for a 51.1 percent stake in HPCL, or 473.97 rupees per share.
That amounted to a premium of about 14 percent to Friday's closing price, and ONGC expects to complete the deal - first announced last July - by end-January.
HPCL shares fell as much as 3.8 percent as the value of the deal was lower than market expectations. ONGC also said it would not buy shares from minority investors, contributing to the share fall.
Jefferies said it had expected 500 rupees per share, adding the deal would boost ONGC's earnings per share by 4-6 percent, while leaving its valuations at just 8.5 times price-to-earnings for the 2019 financial year.
"ONGC will not be paying an egregious premium," the brokerage said in a note to clients. Local media reports had indicated ONGC could pay a higher premium. Jefferies retained its "buy" rating on ONGC and "underperform" on HPCL.
Meanwhile, Emkay Research said the deal would diversify ONGC's operations given that the company is focused mainly on exploration and production, while HPCL is focused on refining and marketing.
"The deal will allow ONGC to navigate periods of oil price downturns relatively smoothly, as refining margins typically expand during such periods," Emkay said in a research note.
"Integrated companies tend to generate higher returns during a down-cycle in oil prices compared to a pure-play upstream company."
ONGC shares were up 4.2 percent at 0529 GMT, compared with a 0.05 percent gain in the broader NSE Nifty HPCL was down 3.5 percent.