Almost seven years after listing of its biggest company, Oil and Natural Gas Corporation (ONGC), the government will be going in for a five per cent disinvestment in it later this year. In an interview with Jyoti Mukul and Ajay Modi, Chairman and Managing Director R S Sharma speaks on the challenges of a peaking market and welcomes the entry of Vedanta into India’s exploration business. Edited excerpts:
In the past, you had said the price-earnings (PE) ratio for ONGC does not reflect its real value. As you prepare for a public issue, how do you think the company can be valued correctly?
For any oil and gas exploration and production company, the most important thing is the reserve replacement ratio (reserve accretion to production ratio) in a year). In that respect, ONGC’s performance is extremely satisfactory; in the past six years, the ratio has been consistently more than one. However, our enterprise valuation based on oil and gas reserves is quite low as compared to global peers. The subsidy sharing on an ad hoc basis acts as a dampener.
Once there is clarity and more transparency in this mechanism, investors would be in a better position to take a call on investing in the company. The ministry of petroleum and natural gas is aware of this issue and I am confident they will be able to devise some mechanism before disinvestment in ONGC is taken up.
The Sensex touched a 32-month high on Tuesday. Do you think the market is stable for the government to come out with big public issues?
We have heard certain statements from the government that there should be some reasonable gap between two divestment transactions. The market is peaking at this time. However, if too many issues come together, the market will get crowded. Although there is appetite in the market, it is ultimately also a game of demand and supply. The call has to be taken by the government. They have already said the follow-on issues of Indian Oil Corporation and ONGC will be in the last quarter of this financial year. Except SAIL and Coal India Ltd, the remaining issues are smaller in size.
The ONGC and GAIL issues came in the last quarter of FY04. There were other issues in the market but ours was highly successful and fully subscribed. Sentiments are positive, especially for stocks like ONGC, as there is much more value to be unlocked. Our systems and procedures are well established. We are fully aware of the risk factors. Hence, this time also we expect a similar positive sentiment of investors for the follow-on offer.
How prepared is the company for the issue?
We will be appointing independent auditors for assessing our reserves. Normally, we carry out the reserve auditing exercise once in five years but because of the upcoming issue, we plan to do it this time within three years. It will be completed in three to four months. The management is going to take a decision on this very soon. Such an exercise normally takes around eight months; therefore, we may need more than one reserves’ auditor this time.
The last time this exercise was done, we were happy it matched our assessment. It is reflective of our credibility among the investors.
Entry of the Vedanta group, with its expertise in mining, through Cairn India will see one more player in the domestic oil and gas business. As a dominant player, do you welcome the entry?
We have seen the best of efforts from existing players under a competitive environment. There are a lot of exploratory efforts to be done in the Indian sedimentary basins and thus the coming of more players is a welcome sign.
Do you think there are gaps in the policies governing the exploration and production business, with respect to seeking government approval for corporate deals?
It is a valid question but we have to look at the prospectivity of our basins. Russia is known to have very good prospectivity. They are producing the highest volumes of oil and gas as of now. They can afford to be more stringent. Here, in India, the government needs to do more balancing to attract investments. How it is done remains to be seen.
