In IOC sale, some see desperate bid to throw away equities

IOC has plummeted from 52-week high to 52-week low in line with markets

The government’s decision to divest stake in Indian Oil Corporation (IOC) has left most market participants surprised. It has come at a time when the market is trending downwards; most stocks, especially from the public sector, are getting hammered without any significant change in the fundamentals. IOC, too, plummeted from 52-week highs of Rs 375 on January 18 to 52-week lows of Rs 186.20 on July 31.

Experts are questioning the timing of the divestment. For instance, by selling its 10 per cent holding in IOC, how much money will the government be able to garner when almost half of the company’s market capitalisation has already been erased? Is the government trying to sell valuable stake in such companies at throw-away prices?

Even at the current market price of Rs 194, divestment of 10 per cent stake will only help raise Rs 4,704 crore. And, this is assuming no discount to investors, which seems very unlikely. Considering the discount, the government is likely to receive less than Rs 4,500 crore. Chokkalingam G, executive director and chief investment officer at Centrum Broking, too, feels it is not a good time to increase equity supply in the system.

While the government has to meet its Rs 46,000-crore disinvestment target for FY14, any such move will only indicate its desperation for funds in a bid to bridge its fiscal deficit.

The other key question is who will want to buy the stock even at these levels, given the uncertainty over subsidies, rising crude oil prices and a weak rupee, and high debt on the company’s books?

The oil marketing companies (OMCs)’s stocks have plummeted significantly after the rupee depreciated, crossing 60 to a dollar. Rupee depreciation increases the import bill. However, they will continue to sell fuel at subsidised prices leading to higher under recoveries (the difference between the cost and selling price of the fuel). Though the government does compensate for the under-recoveries, the compensations come with a lag. This increases the working capital requirement of the companies and, in turn, higher interest costs and impacts on profits.

Rupee depreciation also dilutes the benefits of fuel (petrol and diesel) price rises. The diesel under recoveries that stood at around Rs 8 a litre has increased to Rs 9.10 in spite of diesel price rises. There is another potential risk. The oil subsidy bill that the government expected at Rs 80,000 crore has now increased to Rs 1,30,000 crore. The government, which is already under pressure on current account deficit, may try passing down the burden on oil companies, impacting their profitability.

Looking at these factors and especially the uncertainty on subsidy sharing mechanism, there will be fewer buyers, say experts. P Phani Sekhar, fund manager at Angel Broking, does not see many buyers looking at the above-mentioned factors. He adds that the experiences of investors with earlier divestments have not been good as most of these stocks are now trading lower than their respective offer price.