Essar Oil has on the 26th of June intimated to the stock exchanges that the promoters of the company wish to voluntarily delist the company from the stock exchanges. The floor price fixed for this delisting is Rs 108.18. The first thing that comes to mind is that it cannot be in the interest of shareholders as the Essar Group led by the two brothers Shashi and Ravi are non-investor friendly. Time and again in various issues it has been noticed that their actions have always been to benefit themselves or enrich themselves at the cost of minority shareholders and there has been no interest of shareholder ever considered or looked at.
2014 is certainly not different in any manner and by this voluntary delisting the group certainly stands to benefit, but unfortunately for them the investor stands to benefit more if he reads into the emerging signs. What has prompted the group to make this voluntary delisting? Is it some old age remorse or some feelings for small investors or non-promoter investors in their old age? No way. The reason is that they need to delist because of compulsions of listing and the bigger reason which we need to understand is that the industry has turned the corner in the country. This is the key takeaway that the industry has turned the corner and when the industry is making money they want all of it for themselves.
Diesel prices have been raised in the country by the standard 50 paisa a month and are now at virtually market driven prices. A petrol pump or fuel outlet needs to sell both diesel and petrol and private players like Essar and Reliance were not getting any subsidy on selling these fuels. Such fuels can only be sold at prices which are similar to that of the PSU OMC’s. With three distinct events happening it makes sense to again begin retailing these fuels. They are firstly that market prices are similar to cost of manufacture and there is virtually no under recovery of any sort. Secondly global crude oil price are softening making the products cheaper and thirdly the India rupee is stable and therefore makes crude overall and the refining business profitable.
The biggest reason for the unfriendly Essar brothers to delist is that when the going is good they want the whole pie for themselves. This is as per their style of working and their attitude towards minority shareholders. But to their credit they are smart businessmen and they have given clear indication that the good times or “ACCHE DIN” for this business is already here.
Great news but fortunately for investors Essar Oil is not the only refiner. The largest refiner in the private sector is Reliance Industries but there are issues between the company and the government. The three PSU oil marketing companies have turned in significantly improved results since these under-recoveries have gone down and more importantly have begun to repay loans which were taken to fund working capital because of losses. This will reflect in their working and profits as interest cost comes down.
There is yet another reason why Essar wants to delist the shares. There promoter holding is 24.90% and shares held by custodian against depository receipts is 65.64%, making a total of 90.54%. Under listing guidelines they need to either bring this down to 75% or delist. Their track record is so poor that to sell shares to investors domestically or globally is going to be a tough job, so they are choosing to buy out the shareholders.
Let us look at the stock price movement of these companies. Since the beginning of the financial yearBPCL is up 70%, HPCL up 59% and IOC up 43%. In the same period Essar Oil is a whopping 146% up moving from Rs 51 to Rs 126.75. This price is higher than the floor price indicated by the company.
What are the options to a shareholder in Essar Oil? There are two options primarily with the first being to tender the shares and the second to refrain from doing so. I believe it makes no sense to tender the shares as it may not be the most tax efficient method as capital gains is applicable if the shares are not traded on the exchange. Secondly one must consider the track record that even though the management has its constraints in this voluntary delisting they are a cash strapped company and group and have had to borrow for this delisting. The share capital of the company is 144.95 cr shares. Buying of the non-promoter holding involves 13.71 cr shares and considering the present market price of Rs 125 entails an outflow of Rs 1,700 crs. If this price is to be raised they need more money and knowing the management of the company they are quite likely to allow the voluntary delisting to fail.
The best option for investors according to me is that assuming you are bullish on the oil and gas space and believe that refiners will make money, exit your holding in Essar Oil in the market so that it becomes tax efficient and then buy equivalent amount in either the three PSU companies or Reliance who is the largest private player and an integrated player with upstream and downstream in any combination you may choose. Incidentally Reliance is also in the process of reopening its petrol pumps.
In conclusion my advice to investors is the famous Hindi saying which translated means that the dog’s tail even if kept in a pipe for seven years will still remain curved applies well to Essar Oil management. They as a group will never change, it is for us to change. Switch your investments.