OIL India : Subscribe at ‘Bata’ price

OIL India Limited is tapping the capital markets with its maiden IPO. Oil India is in the business of exploration, development, production and transportation of crude oil and natural gas onshore in India. OIL (Oil India Limited) processes natural gas to extract LPG. Currently the company has producing blocks primarily in India and conducts exploration activities independently. The company has exploration activities internationally in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen. 

Issue Structure 
Total size of offer 2,64,49,982 Shares of Rs 10 each (11% of post offer equity capital)
Employee Reservation 24,04,544 shares (1% of post offer equity capital)
Net issue to public 2,40,45,438 shares of Rs 10 each
Qualified institutional Bidders 1,44,27,263 Shares
Non Institutional bidders 24,04,544 Shares
Retail investors 72,13,631 Shares
Price Band Rs 950 – Rs 1050
Offering Size Rs 2513 crs to Rs 2777 crs
IPO Grading IPO grade 4/5 by CRISIL Limited
Offer Period September 7 to September 10
Listing BSE and NSE
Book Running Lead Managers J M Financial, Morgan Stanley, Citi and HSBC

The hydrocarbon industry in India is highly regulated and we have regulations, price controls, subsidies etc. The biggest burden on the industry is the unrealistic price at which kerosene and LPG is sold to the consumer. The resultant loss or under-recoveries is split three-way in a formula which has basically been ad-hoc and revised from time to time by the central government. This burden of subsidy which falls on the PSU units in this sector have affected not only the fortunes of the companies but also to some extent made them weak financially and affected the performance of these companies.

Whenever there is a disinvestment from any such company, the issue of subsidy is always in the forefront and top of the mind of analysts. This time was no exception, but the government was prepared for the same and answered accordingly. The Union Budget for 2009-10 clearly states that no under-recoveries on account of kerosene or LPG will have to be shared by upstream or downstream companies. This will form part of the central budget. This I believe is a certain positive for the exploration industry and will help them expedite the process of energy security for the country. 

Whenever one talks of OIL, ONGC comes to mind. Very clearly ONGC is the big brother of OIL and from the table below it can be seen that by and large ONGC is ten times the size of OIL. Broadly speaking on parameters of efficiency, earnings and performance the similarities are more than striking and one could say that they are identical. In terms of size there is a clear cut difference and ONGC is about ten times in size.

ONGC Group OIL India Limited
Production – approx. 448 MBOE Production – approx. 40 MBOE
Turnover – Rs 109000 crs or 1.09 trillion Turnover – Rs 7100 crs or Rs 71 billion
Profit After Tax Rs 19700 crs Profit after tax Rs 2200 crs
Equity – Rs 21.38 billion Equity – Rs 2.14 billion (pre-IPO)
Earnings per share (FY 09) Rs 92.35 Earnings per share (FY09) Rs 101
P2 Reserves – Oil – 5247 million barrels P2 Reserves – Oil – 577 million barrels
Gas – 628 bcm  = 3831 mn barrels Gas – 63 bcm  = 387 mn barrels
Oil + Gas = 9078 mboe Oil + Gas = 964 mboe
Return on net worth 25 % Return on net worth 23%
MBOE = million barrels of oil and oil equivalent 
BCM = Billion Cubic Metres

NHPC has just listed a few days back and very clearly the listing of the same was a disaster considering the overwhelming response the issue garnered. HNI’s had invested Rs 35000 crs in an issue where shares worth Rs 580 crs were to be offered to them. There cost of funds was in a range of Rs 6.75 – Rs 7.25 per share and each one of them has either booked a loss or is holding on to a huge loss, hoping that the price improves. In this scenario the question that comes to mind is should one invest in OIL by applying for the issue and if yes at what price?

The price band is Rs 950 -1050. ONGC shares closed at Rs 1157 on the BSE on 2nd September, a premium of roughly 10.19% over the upper price band of OIL. Broadly speaking a large number of people believe that because of size that ONGC has there should be a 9-11% premium that ONGC should enjoy currently over OIL. If that be the case, then pricing of OIL at the upper price band leaves nothing for the investor on the table after listing. The assumption that price of OIL and ONGC will rise post listing is fine but let us understand that ultimately both will move in tandem unless one finds large reserves of oil and or gas and the other makes no progress.  Market players also feel that with the NHPC saga, the government should lower the price and allow investors to make some money. 

This is a catch 22 situation and needs careful attention of all concerned. Reduction or change in price band is not a possibility. Pricing at the lower band is tantamount to accepting the pricing as inappropriate. The only solution or option in my view is something in between. Thomas Bata is very well known and introduced a concept known as “BATA Pricing”. Products in his shop were sold at 99.95 and 199.95 and so on. The lead managers may take a leaf out of BATA and recommend a price which is ‘three digit’ and on listing becomes ‘four digit’ so that investors may make money and some sort of compensation or relief may be offered for NHPC. Secondly there is no loss of face for anybody be it the promoter of the company (in this case the government) or the merchant bankers and finally with a positive gain on listing day for investors, the dampened sentiment revives – something which is very important with the huge pipeline in store.

I believe retail investors should apply at the magical figure of Rs 999, the last three digit price and not at cut-off. My rational is that suppose the issue is substantially oversubscribed and the price fixed is at Rs 1050, the possibility of listing gains seem remote at current market price of ONGC. The loss of interest for a retail investor is Rs 2.85 per share assuming an investment of Rs 999 bearing interest of a fixed deposit of 8% per annum for 13 days. The worst case scenario is that the issue is priced at the highest price and the investor is not allotted anything. In such a case by losing on the interest alone the investor is out and with virtually no listing gains possibility he is saved from a bigger potential loss.

In conclusion I believe the best an investor can do is apply at the recommended price of Rs 999 and expect the promoters to be reasonable in the price discovery  and be considerate to investors looking at the sentiment of the market. 

SEBI disclaimer: I intend to subscribe at the recommended price.  

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One Response to “OIL India : Subscribe at ‘Bata’ price”

  1. hiten mehta says:

    Sir i salute you for the Bold Write up and the best part observed as on today is its always in the interest of Investors irrespective of Catagory, and the language used by you to convey your thoughts\Points is very Lucid which straight away enters any body mind GOOD SHOW SIR THANKS

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