 "IOC stake sale: Long-term gains for ONGC, Oil India")
The idea of divesting 10% stake in IOC has been doing the rounds since the past few months in order to help the government meet its divestment target. Hence, the EGOM has decided to use the cross-holding route – pushing the two upstream public sector companies to buy stakes in IOC.
The sale of 242.7 million shares in the company was approved, though it wasn’t decided how much stake each company would acquire. (ONGC holds 8.77% stake in IOC)
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Though the modalities and details are still being worked out, at the stock price of IOC (Rs 212), the government will be able to garner around Rs 5,150 crore. Hence, OIL India and ONGC will have to shell out around Rs 2,600 crore each assuming both companies buy an equal i.e. 5% stake each in a company that generated just Rs 200 crore free cash flows in FY13 (net of financing and investing activities).
Additional burden
Though ONGC and OIL India are cash rich, analysts suggest that this move could put their balance sheet under stress. ONGC had cash and cash equivalent of Rs 19,566 crore at the end of September 2013 quarter, while Oil India had Rs 11,610 crore.
Since the complete details and when the share sale will take place and also at what price, it is still not clear, analysts expect the EPS (earnings per share) of ONGC and OIL India’s to decline by Rs 0.2 and Rs 2.6, respectively.
The deal is a short-term negative for the two upstream companies. However, the fact that the companies will buy IOC’s shares at a subdued level bodes well in the long-run.
Nitin Tiwari at Religare Capital Markets feels that as the macros will improve over next six – nine months that could push up IOC’s stock price. Another positive for the companies is that there is no lock in period. Simply put, ONGC and OIL India can sell their stakes as and when they find it suitable.
Fundamentals
As far as fundamentals are concerned, the crude oil (Brent) prices are cooling off given adequate demand – supply equation. Output from Libya and Iran is improving and that should see a pick-up in supply, should the demand rise.
On the other hand, the Rupee – dollar equation also remains stable at around 62 to a dollar. The experts feel the dollar should continue trading in Rs 62-64 range and have negate worries on the subsidy front.
In such a scenario OIL India and ONGC should see some benefits accruing in the medium-term despite the near-term headwinds.