IPO OF OIL INDIA LTD (OIL)…Upper band Price of Rs 1050 appears fair but there’s not much listing Upsteam for this Upstream Oil PSU

This is a  Scan of the OIL IPO

I like OIL…Rs 1050 (FV Rs 10) Upper band Price appears fair…but I would await Listing before consdering any meaningful exposure

In it’s continuing disinvestment exercise now the Government wants us to explore OIL with it…but at an upper band IPO price of Rs 1050…OIL will raise Rs 2777 crs at this price to largely fund Exploration and Development Activity and Capex for the next two years 

So should you ? The issue closes tomorrow,September 10,2009

Market & Technical Factor that lends support on Listing is the low Floating Stock

Well IOC,HPCL and BPCL are helping out the Government …they will buy an aggregate of 21.40 million shares at IPO Fixed Price from the Government of India …this is 8.91 % of post issue capital…Government will continue to hold 188.60 million shares or 78.43% of the post issue equity of Rs 240.45 million shares…others hold 4 million shares pre issue…The IPO will release a fresh 26.45 million shares…thus you’ll have a floating stock of 30.45 million shares…This low floating stock should support Rs 1050

Fundamental Factors that support Rs 1050

The Government took 30 earnings multiple in NHPC pricing it at Rs 36…that was greedy…For OIL the Earnings Multiple is 10 at the Price of Rs 1050…It earned Rs 2162 crs on an Equity Base of Rs 214 crs….EPS was over Rs 100….Reserves were 9173 crs to give a networth of Rs 9387 crs…..It’s relatively debt free and maintains cash of over Rs 6000 crs…With Q1 profits at Rs 740 crs in FY 10 the networth has now crossed Rs 10000 crs…that’s a updated Book Value of Rs 471…so IPO Price of Rs 1050 is 2.2 times book….. that’s fair…Post IPO the Networth zooms to Rs 12848 crs,with Equity at Rs 240.45 crs and Reserves moving up sharply to cross Rs 12607 crs and give a new Book Value of Rs 534…so the Issue Price is twice book…OIL is already a Bonus Candidate…This IPO enhances this status…so we can expect a Liberal Bonus a year or two down the line surely !….The Market Cap at Rs 1050 will be over Rs 25000 crs and the EV/Proven+Probable Reserves ratio is relatively low at 4 against 5.4 of ONGC and near 13 of Cairn India…though it’s EV/EBITA is over 8 and comparable with Peer Group in India and even overseas 

Then  why am I not so ecstatic for applying in the IPO ?

Technical and Market factors that don’t excite me to apply

  • The Retail Portion of 7.21 million shares should be oversubscribed 3 times garnering around Rs 2250 crs…One can apply for a maximum of 90 shares and the allotment would be 30 shares…assuming Listing gains of Rs 100,that’s gains of Rs 3000…Percentage wise looks good at 3% for a month but in absolute terms not too much
  • For the High Net Worth Category of Non Institutional Bidders the 2.4 million shares on offer requires just Rs 252 crs for a one time subscription…Expect atleast 20 times oversubscription…so even if one applies for 10000 shares putting up Rs 1.05 crs,the allotment would be 500 shares at best…that’s gains of Rs 50000,assuming Rs 100 listing gains…that’s under half a percent for the month…If you’re going for leverage,your incremental cost comes to Rs 84 on 10% interest and 20 times oversubscription…not worth it

Fundamental Factors that raise questions on the pace of future profitability in the business 

  • OIL is completely regulated by the Government…how much to produce…who to sell to…how much should it share in the under-recoveries…that’s the subsidy…..so even if Crude Oil Prices rise,the Government would raise OIL’s share of under-recoveries(for upstream oil companies the basis is prior year profits) and take away some advantage of increased profitability 
  • Exports are not allowed by the PSCs under NELP until national demand is met from domestic production…With India growing at 6%,it’s high oil intensity will mean continuing dependence on Oil Imports for years to come…As of December 31,2008,the domestic consumption exceeds domestic production by 73%…This impedes monetisation of reserves
  • OIl also is an onshore explorer.At March 31,2009 it had an independent proved plus probable Oil & Gas reserves of 974.2 million barrels of oil equivalent.Of this 575.4 million were Oil Reserves and 63.2 Billion cubic meters were Gas Reserves…All of the Oil Reserves and 93.66% of Natural Gas Reserves are in the maturing Upper Assam Basin…Production  is on a decline in Ten of the Fifteen Producing Fields spread over 4351 sq km and 2147 wells…This is natural as reserves begin depleting on production…OIL estimates 23 years of production from these reserves
  • Government has opened out  by allowing 100% FDI in Oil & Gas Exploration…this will intensify competition going forward…since 1999 in the seven rounds of NELP bidding ,OIL has bid for 55 blocks,been awarded 27 and has relinquished three of these  
  • OIL continues to share the burden of under-recoveries by contributing to the Oil Subsidy…In the three months ending June 30,2009,it contributed Rs 57.6 crs,it’slowest in the past few years…this was because of lower crude prices and the fact that now they need to share in only under-recoveries in Motor Spirit and Diesel and not in LPG and Kerosene…But in FY 2008 and FY 2009 OIL subsidy burden was Rs 2305 crs and Rs 3023 crs respectively….This would compute to a net realisation in FY 09 of US $ 55.8/barrel after subsidy of US $ 25.9/barrel  and on Gross Realisations of US $ 81.7/barrel….but before Royalty and cess…In FY 10 the subsidy burden is expected to be below US $ 10/barrel on lower crude prices…however net realisations should remain similar
  • 92 % of Sales (Rs 6594 crs in FY 09 and Rs 1755 crs for three months at June 30,2009) is from Crude Oil from Upper Assam Basin..all of this is transported through a single 1157 kms pipeline (Build in 1962) to four PSU Refineries in the North East…This pipeline is literally the lifeline and is exposed to several risks of natural catastrophy,breakdown,maintenance issues,terrorist activity,sabotage etc….OIL has storage facilities for only four days of production
  • Income Tax Disputes aggregate claims of Rs 1232 crs from AY 2203-4 to AY 2006-7 and Rs 717 crs claim raised further  for AY 2007-8
  • Proven and Probable Natural Gas Reserves of 63.41 billion cubic meters are not monetised adequately as there is little demand in Assam…In FY 09 OIL produced just 2.27 billion cubic meters and only 0.6 billion cubic meters in the three months till June 30,2009

In Conclusion

I don’t see  Profitability doubling to Rs 4000 crs in the next few years…This would have given an EPS of Rs 160+ and on a 10 Multiple a Price of Rs 1600 + and a 50% return on the IPO Upper Band Price of Rs 1050…and I don’t see significant re-rating to 15 Multiple

It is natural to compare OIl with ONGC…on most parameters  ONGC scale is ten times that of OIL…At Rs 1180,the market respects ONGC 13 times earnings and 3 times book

OIL is a good Company…but most Portfolios already have adequate exposure to the Hydrocarbon sector through ONGC,IOC,HPCL,BPL,Reliance Industries,Reliance Petroleum and Cairn India…If you want to add OIL to this basket,then await Listing and consider a meaningful exposure in it…Downside Risk is limited as it’s Earnings Multiple is a fair 10…the Industry shows a High of 27 and a low of 7…so don’t expect OIL to slip well below Rs 1050 on listing…Low floating stock and potential lower sharing of subsidies in absolute  will support this price of Rs 1050 in the short term…add to this the possibility of a Bonus in the next two years !…For this OIL would not have to issue a Bonus for the reason Reliance Power did,that too before it has begun operations !..that is to bring down the Holding Cost ! because the IPO was at an Obscene Price ….It would be a genuine Performance Bonus from OIL

So await Listing to consider a meaninful exposure to OIL..I see a quoted price range of Rs 950 to Rs 1250 in the short term    

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