Govt. Approves ONGC Stake Sale, Sets Floor Price At Rs 290 Per Share

After much deliberation and dilly-dallying, the govt. has finally approved the ONGC stake sale. This gives a shot in the arm to its disinvestment program, which has been a serious laggard all throughout this fiscal. Investors must note that unlike the conventional Follow-on-Public Offer (FPO) route, the govt. has chosen the auction method to carry out the envisaged 5% stake sale this time round. To read further on the proposed stake sale via the auction route, we recommend that readers glance through our previous article (Link:- ONGC May Help Fill Government Coffers – dated 25th Feb 2012).

The govt. has decided to set the floor price for the auction at Rs 290 a share, which is at a 2.3% premium to yesterday’s closing price of Rs 283.50 per share. At the set floor price, the govt. is likely to garner Rs 12403 crore through the sale of 42.77 crore shares.

The BSE has been chosen as the Designated Stock Exchange (DSE) through which all trades would be carried out during the auction hours. As mentioned in our earlier article, the trading hours applicable to the auction would be normal working hours between 9:15 am and 3:30 pm. The day-long auction would be carried out on 1st March, 2012, and the allocation would be completed over the next 2 working days. The allocation methodology has been kept as per ‘Price priority’, which means that there will be multiple clearing prices at which shares would be allotted to bidders.

While the shares would be sold to institutional and retail investors, given the premium attached to the offer, we don’t expect much retail participation.

During the first half of FY2012, ONGC had a good run. Its net realisations rose by a 20 per cent on a YoY basis to USD 66.52 per barrel despite a 108% jump in subsidy discounts. This robust performance was mainly led by stable volumes and a push from the sharp rupee depreciation.

However, the recently concluded Dec 2011 quarter results came as a major disappointment, where ONGC saw its topline fall by 2.4% on the back of stagnant volumes. The net realisations were also dampened, as the govt. directed the upstream major to foot a larger portion of the fuel subsidy bill. The only saving grace for the company came in the form of a one-time royalty payment from Cairn India amounting to Rs 3142 crore, which helped cushion the otherwise 35% bottomline fall on a YoY basis.

Going forward, owing to the rising subsidy burden and the govt. directive to compensate 38% of losses incurred by the oil marketers as against the usual 33%, we expect ONGC’s next quarter financial performance to come under pressure. However, given its pioneer position in the Indian oil & gas space and the sheer enormity of its operations, ONGC is always a worthy long-term buy.