ONGC FPO which was scheduled to open on Tuesday the 20th of September 2011 has been postponed. Various reasons including the sudden decision to raise petrol prices with immediate effect by a steep Rs 3.14 per litre and no increase on diesel prices is also mentioned as one of the reasons for the postponement.

Irrespective of what may be the actual reason, one will never come to know the same. However one thing is sure trading on Friday the 16th of September is likely to be a Black Friday. Some of the reasons for this are as follows: -

• The hike in petrol prices will lead to higher inflation, prompting RBI to raise interest rates once again in their meeting of 16th September
• Petrol price hike without any diesel hike shows the reluctance of the government in tackling the subsidy issue and the political fallout from the same.
• The postponement of the ONGC issue even temporarily indicates the fragile and nervous state of the market. If a company like ONGC is unable to raise 2.4billion dollars from the market because of market conditions it certainly sends wrong signals to investors globally about the India story and Indian Stock markets.
• The ONGC issue appears to have been postponed by 15-30 days. One is not sure whether this postponement or delay will cause any significant positive impact to valuations or not. The bigger concern is that if crude prices rise or the rupee depreciates further ONGC would be a loser because the under-recoveries would increase.

One needs to remember that advance tax numbers which have reported today do not show any significant improvement of any kind over the previous year. This certainly shows that the growth or performance in Q2 would continue to be impacted and this could be negative for corporate India. What then could impact our markets positively; particularly ONGC is a mystery to me.

In the immediate term the discount between ONGC spot price and the futures price which is trading at aa discount of Rs 7 would reduce with the issue being postponed atleast for the time being time. The current discount should come down significantly and may reduce to less than Rs 2.

Let’s hope the markets do not get impacted severely in tomorrow’s trading.

ONGC has filed its RHP for its forthcoming FPO (follow on public offer). The issue is to open on Tuesday the 20th of September and will close on Thursday the 22nd of September for QIB’s and for all other investors on Friday the 23rd of September. The issue size where the Government of India will be the only seller and will reduce its holding from the present 74.14% to 69.14%.

The issue is for 42,77,74,504 shares and has a reservation of 85,53,168 shares for employees. The net offer is 41,92,21,336 equity shares which would be offered in a ratio of 50% for QIB’s, 15% for HNI’s and 35% for retail investors. There will be a discount for employees and retail which would be announced along with the price band one day before the issue opens. In all probability the price would be announced over the weekend.

The closing price on Tuesday the 6th of September is Rs 260.95. Assuming the same as the FPO price the size of the offering is Rs 11,162.77 crs. Considering that there would be a discount to employees and retail and also some discount to the current market price one can assume the issue price as Rs 250 and a discount of Rs 12 to retail and employees. The total size of the issue would then get reduced to Rs 10,525 crs. Whichever way one looks at it this would be the first big issue in the current year to hit the market place in the current year 2011-12. The success of this issue would prompt many others to tap the capital market in the near future.

The details of the subscription level in various categories are given below: -

Looking at the response to the issue it appears very logical to expect the issue to be priced at the top end of the price band at Rs 203. The share has closed in the cash market at the BSE at Rs 215.85. The share price may fall from these levels considering the difference in the issue price and the market price, but the margin of safety is simply huge to expect any negative performance in this stock. Secondly there is a discount of 5% which would amount to Rs 10.15 per share assuming the top end of the price band is fixed at the issue price.

The retail subscription is more than the HNI portion and the only reason that HNI subscription was relatively poor was the fact that fresh positions in PFC were not allowed in the futures segment, making it difficult for HNI’s to hedge their position.

It is difficult to understand the phycology of HNI investors where in an IPO they take huge leveraged positions and are unable to sell their position in the premium market and most of the time losing money when the share lists on the bourses. A recent example was Muthoot Finance where the HNI portion was subscribed 60 times and the cost of leverage for a HNI investor was in the region of Rs 30. The share did not even touch the figure of Rs 200 which would have meant a gain of Rs 25. The share closed on Friday around Rs 165.

All in all the subscription for PFC FPO has been good and has set the divestment for 2011-12 in motion. Well begun is half done and let us hope that in future issues the government continues being considerate and liberal in the pricing of the issues.

Power Finance Corporation Limited is tapping the capital markets with its FPO (follow on public offer) where the QIB portion has closed for subscription being subscribed 6.92 times. The issue closes for non QIB’s on Friday the 13^th of May.

Business

PFC is a leading financial institution in India focused on the power sector. The company is also involved in various Government of India programs for the power sector and is the nodal agency for the UMPP (ultra mega power projects) in India. The company as part of its business provides a comprehensive range of financial products and related advisory and other services from project conceptualization to the post-commissioning stage for clients in the power sector, including for generation (conventional and renewable), transmission and distribution projects as well as for related project finance, short term loans, buyers line of credit and debt refinancing schemes, as well as non-fund based assistance including default payment guarantees and letters of comfort. PFC also provides various fee-based technical advisory and consultancy services for power sector projects.

Investment Proposition for retail investors

The price band fixed is Rs 193-203 with a discount of 5% on allotment for retail investors. For simplicity sake let us assume that the price would be fixed at the upper band of Rs 203, and a discount of Rs 10 would be offered to retail investors. The closing price of the stock on Thursday the 12^th of May in the cash market was Rs 215.85 implying a safety factor of Rs 12.85 or 6.33%. What this means is that even if the cash market were to fall by Rs 13 on allotment and subsequent listing of the shares, the investor would be covered as his cost is only Rs 203 and on top that there is the retail discount as well.

PFC trades in the futures segment as well and the closing price on 12^th May is Rs 205.30. An important point to be noted here is that fresh positions in the stock have been banned as the open interest limit has been breached. This means that the extra safe HNI’s who apply for the issue after hedging themselves are unable to take fresh positions. This is also good for the investor as the gap between the future price which is trading at a discount to the cash market will converge going forward.

I believe this is a great opportunity for retail investors and they should subscribe to the above issue.

SEBI Disclaimer: – I intend to subscribe to the above issue.

I believe this is a good opportunity for retail investors to subscribe to the issue as it offers decent returns for investors in the immediate and medium term. This being an FPO already has a discovered price and there is a discount for retail investors of 5%. The discount plus the difference between the current price and the upper end of the price band is the margin of safety for the investor.

Power Finance Corporation Limited announced the price band for its follow on offer which opens on Tuesday the 10^th of May and closes for QIB’s on Thursday 12^th May and for non QIB bidders on Friday the 13^th of May. The price band is Rs 193-203. There would be a discount of 5% for retail investors and eligible employees.

The issue consists of a fresh issue and an offer of sale. The total issue size is 22,95,53,340 Equity Shares which comprises of a fresh issue of 17,21,65,005 shares and an offer for sale by the Government of 5,73,88,335 Equity Shares.

The share closed for trading on the BSE on Friday the 6^th of May at Rs 214.55. The discount being offered at the lower price band is Rs 21.55 or 10.04% and Rs 11.55 or 5.38% at the upper end of the price band.  Retail investors and eligible employees would be offered a discount of 5% on the final price band fixed.

If one were to look at the weekly price chart the share price has been falling continuously for almost 10 months now and has literally become half. The price band offers scope for appreciation from these levels.

The size of the issue would be Rs 4,430.38 crs at the lower end of the price band and Rs 4659.93 crs at the top end of the price band.

Shares of PFC closed at Rs 249.60 and at this price the market cap of the company is Rs 28,648.34 crs. The issue at current market price would raise Rs 5,730 crs. This issue is likely to hit the markets only in the first quarter of the financial year 2011-12. Retail investors would be eligible for the 5% discount.

PFC had tapped the capital markets in January 2007 when the Government had divested 10% of its holding at a price of Rs 85. The present shareholding of the government is 89.78% while the public is 10.22%. The shares of PFC have been on a downtrend for the last three to four months and have fallen from a high of Rs 383 made on the 14th of October 2010, to an intraday low of Rs 239.10 made on Friday the 11th February, the last day of trading for the week.

The size of the issue is big and there could be some short term pressure on the share going forward. The company has earned a net profit of Rs 2,012.05 crs for the nine month period ended December 2010 against Rs 2,357.25 crs in the year ending March 2010.

Shares of Tata Steel closed at Rs 630.95 on Tuesday at the BSE. The share could be under pressure as people sell against the allotment received in the FPO.

The detailed subscription details of each category are given below.

Makes better sense to buy post FPO from market

Tata Steel Limited which has launched its FPO which opened on Wednesday the 19th of January and closes today for 5.7 cr shares in a price band of Rs 594-610. The company had earlier allotted 83.25 lakh shares to anchor Investors. With the issue closing today the response for the issue so far has been a little lacklustre with the overall issue being subscribed 0.48 times.

Tata Steel is a well researched company and it has a very strong investor base. There is little point in discussing the company as it is well known and there are enough reports on the same available.

Objects of the issue

The objects of the issue are primarily to part finance expansion and repay some debt of the company.

Financials

The company is yet to announce its quarterly results for period ended October-December 2010. The updates that have been given on the website indicate that though volumes of steel produced and sold are more or less flat. The company states on its website that “Volumes of steel products sold declined marginally, and net sales expected to be flat compared to the second quarter. Operating results expected to decline somewhat in comparison to the second quarter due to increased raw material prices”.

Tata Steel would announce its quarterly results post the FPO and there is every possibility that the stock could weaken once the FPO is completed.

The comfort one seeks as a retail investor in an issue is the difference between the current market price and the price offered in the issue. Not much exists in this issue and therefore the comfort level is minimal.

Readers would be well advised to read the curtain raiser written on this issue last Saturday which would address issues regarding price and returns etc.

SEBI Disclaimer: – I do not intend to subscribe to the above issue