Should you apply for ONGC FPO which opens on Sep 20

September 7, 2011   ·   0 Comments

Finally after several postponements, follow-on public offer of state-run Oil and Natural Gas Corporation (ONGC) will open for subscription on September 20, 2011. Government will offer 42,77,74,504 shares (dilution of 5% post issue) through this FPO, which will close on September 23. The offer comprises a net offer to the public of 41,92,21,336 equity shares and a reservation of 85,53,168 equity shares for subscription by eligible employees.

www.stockssavvy.comIf we consider FPO price at Rs 250 a share, the issue size comes to Rs 10,700 crore. Market capitalisation of the company stands at Rs 221,073.86 crore. In the financial year 2010-11, the company reported sales turnover of Rs 66,154.88 crore and net profit of Rs 18,924.00 crore.

Here is analysis by Sanju Verma, managing director and chief executing officer of Violet Arch Capital Advisors, of whether to apply for FPO of ONGC:

According to her. “I have always liked ONGC despite the fact that oil (French crude) was at USD 120 barrel in the last quarter and the net realisation for ONGC was USD 48 a barrel. If you put aside the subsidy issue and look at the June quarter numbers for ONGC, they have delivered profits in excess of Rs 10,000 crore; it has been their best quarter ever with respect to profitability.

Their subsidy burden went up from Rs 5,000 crore for the same quarter last year to more than Rs 12,000 crore for the June quarter this year. Subsidy will continue to be a hangover, but if you put that aside and evaluate ONGC purely from a fundamental perspective, this is one stock that is trading four times, which is at a huge 50% plus discount to international peers, who are trading anywhere between six-seven times on a price to cash. Compare ONGC to the other PSU companies within India be it an NTPC , GAIL or Coal India , which have their own regulatory issues. All these companies are trading at on a price to cash between 9 to 12 times.

From a valuation perspective, ONGC gives you a lot of cushion at current prices. Rs 250 is where standalone ONGC should be trading at. Give it an upside of about Rs 15-16 with respect to royalty related issues and give it Rs 5-7 of benefit with respect to any exploration related issues. After that you will have the price between Rs 350 to Rs 360. So today when you buy ONGC at Rs 250 or Rs 260, you are actually buying standalone ONGC without giving any benefit to its subsidiary, royalty related upside, MRPL, the book value of its investments in other oil and gas companies. So, it could not get any cheaper even it is priced for retail investors at a 5% or 10% discount.

If you are not looking at instant gratification and are playing this for the long haul, then this is certainly a stock that one needs to have in ones portfolio. When ONGC paid the highest ever subsidy at close to USD 36 a barrel, even then ONGC return ratio was in excess of 20%. On return parameters, this is a superior bet with return on equity; return on capital employed in excess of 20% and more. This is a great stock to have irrespective of how the subsidy burden plays itself out. It can not go beyond 40% that they paid last year. There is likelihood that the subsidy burden in the next fiscal year might be capped at 33%. If that happens, then there can be tweaking of EPS on the positive side.”

Keep watching this space for detailed analysis for the FPO

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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