Good Long Term Bet - Oil India

When the UPA came back to power, one of the main agenda for the government was divestment of PSUs. The government has moved in that direction and has now lined up around 16 IPOs from the PSU sector. Oil India is now tapping the primary market by offering 2.65 crore equity shares in the price band of Rs 950-1050. The company will raise Rs 2,782.50 crore on the higher price band and Rs 2517.50 crore on lower price band. The funds raised will be utilized for fiscal 2010 and 2011 towards three purposes: first, exploration and appraisal activities; second, development activities in producing fields and, lastly, purchase of capital equipments and contracts for facilities.

Eleven per cent of fresh equity will be sold in Oil India IPO and the government will divest 10 per cent of its stake. Post-IPO and disinvestment, the government’s stake in the company will decrease from 98.13 per cent to 78.5 per cent.

In the primary market, the moot question is how much the government has kept on the table for the investors? Let’s see where Oil India stands on this score. On the valuation front, the scrip is trading at 11.70x of its FY09 earnings on the higher price band level and 10.60x at the lower price band level. Now this is much lower than 15x of ONGC. Even the EV/EBITDA of 5.37x on higher price band and 5.29x at lower price band level is better placed than 6.51x of ONGC. So, this indicates that on the valuation front the scrip seems to be better placed. Hence, we recommend the investors to go for the issue. But, again, it is a PSU company and one should not look at the issue for making listing gains and should be treated as a long-term bet. The bottomline is, do not expect making quick listing gains, but treat it as a long-term investment which should give good returns in the long run.

As regards the business, Oil India is the second largest national oil and gas company in India, as measured by total proved plus probable oil and natural gas reserves and production. It is engaged in the exploration, development, production and transportation of crude oil as well as natural gas onshore in India. Oil India also processes its produced natural gas to extract LPG. It is also present internationally through the exploration of crude oil and natural gas in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen.
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All of its estimated independent proved and probable oil reserves, as well as 93.66 per cent of its estimated independent natural gas reserves, are located onshore in the Upper Assam basin in the states of Assam and Arunachal Pradesh. Additionally, it has independent natural gas reserves in the Jaisalmer basin in the state of Rajasthan. It is currently conducting exploration activities in 16 blocks located in Assam, Arunachal Pradesh and Rajasthan under the Petroleum Exploration Leases (PELs) granted by the government and 12 NELP blocks.

Its unaudited estimated independent proved and probable crude oil reserves are approximately 575.40 million barrels and its independent proved plus probable natural gas reserves were approximately 63.41 billion cubic meters. The company also owns and operates as a common carrier for ONGC and itself a 1,157 kilometre cross-country crude oil pipeline. The pipeline has the capacity to transport over 44 million barrels of crude oil annually.

Regarding the objects of the issue, Rs 2827 crore will be deployed in exploration and appraisal activities and Rs 1046 crore for development activities in producing field,  Rs 686.28 crore will be required for purchase of capital equipments to augment its E&P operations. While Rs 2782.50 core are to be raised through the IPO, the rest will be financed through internal accruals.

On the financial front, with rising crude oil prices, its performance was good in FY09. In FY09, its topline stood at 8137.87 crore and bottomline stood at Rs 2161.68 crore, as compared to Rs 6795.46 crore and Rs 1788.93 crore. But the performance for the Q1FY10 has not been good as the crude prices declined sharply. The same can be seen from the fact that its gross realization per barrel in Q1FY10 declined to Rs 2805 from Rs 5063 in Q1FY09. But with the global economies showing signs of recovery, crude price are expected to improve and hence the realizations are also expected improve.

As mentioned earlier, the company is placed better on valuation front and hence we advise investors to go for the same with a long term perspective. Listing gains can be expected in the region of 10-12 per cent.