The lukewarm response to the government’s offer to sell its five per cent stake in oil and gas major, ONGC, through the first-ever auction process to institutional investors, may be attributed to the lack of clarity on the subsidy-sharing mechanism and the offer’s pricing. In the backdrop of these issues, most experts believe the stock may see some pressure in the near term.
Ambareesh Baliga, chief operating officer at Way2Wealth, feels the floor price of the auction led to the lukewarm response to the offer. He said the share was trading at Rs 275-280 levels when the auction price was announced, pushing the stock price higher. “If we look at the average price over the past few months, it would come to Rs 260-265 levels. Thus, the floor price should have been near Rs 270. The premium was unjustified, particularly looking at the subsidy issues that ONGC faces, which have a direct bearing on its profitability.”
Mehraboon Irani, head of private client group business, Nirmal Bang, said the response to the offer came as a blow to the government. He added this resulted from a desperate attempt by the government to fill its coffers in a short time. He, however, said the price could not be questioned, as the government could not have sold at a lower price. This was because otherwise, questions would have been raised in Parliament.
The stock, however, is unlikely to correct sharply from Thursday’s closing of Rs 287.85 (down 1.87 per cent compared to Wednesday’s close).
Baliga believes this kind of a response to ONGC’s auction offer would pave the way for future issues to be priced at a discount on market prices. A look at previous examples indicates initial public offerings (IPOs) of public sector units that have been priced at a premium, barring a few, have either been under-subscribed or listed at a discount. He said says the NHPC IPO was a perfect example of this. ONGC’s stock price, according to Baliga, would correct to at least to Rs 275-280 levels.
Some other analysts feel the stock may correct slightly, but not sharply. Arindam Pal, analyst at Asian Market Securities, said, “The fair value of the ONGC stock is around Rs 350. So, it should have moved higher, had the auction been oversubscribed. However, now, sentiments have been affected.”
Most analysts feel one of the key reasons for the lukewarm response to the auction was lack of clarity on subsidy sharing for oil companies. Earlier, concerns were raised by foreign institutions when ONGC had attempted the follow-on public offer, as changes in subsidy sharing (percentage) impacts ONGC’s profitability and adds to uncertainties.
ONGC, which had shared 33 per cent of the total subsidy in the quarters ended June September, saw its subsidy share rise to 47 per cent in the quarter ended December. Thus, while the first two quarters of 2011-12 saw a year-on-year growth of 11.8 per cent and 60.4 per, respectively, in its adjusted net profit, the third quarter saw ONGC’s profit tank 33 per cent, despite higher crude oil prices.
