Oil behemoth ONGC is set to become the first public sector company to take the new ‘offer for sale on stock exchanges' route to enable the government divest a 5 per cent stake. The offer will be open to all categories of investors, from 9.15 a.m. to 3.30 p.m. on Thursday.
Bidding for this offer will require investors to go through the same procedure as in a normal offer, in the sense that bids have to be submitted through brokers.
Offer process
Unlike book-built offers, this offer will not have a price band. Instead, interested buyers can place bids at or above the floor price fixed at Rs 290 per share. With the stock price running up recently, this is marginally below Wednesday's closing price of Rs.293.
Retail investors are not assured of allotments, either by way of reservation or through proportionate allotment.
Instead, shares will be allotted on a ‘price priority' basis. This means that bids received at higher prices would be given higher allocation of shares. If the number of shares on offer (427,774,504) is exhausted at higher prices, those who bid at lower prices may not get allotment at all.
Also, all bids have to be backed by 100 per cent upfront cash margin.
Should you invest?
Investors can consider bidding at floor price — Rs 290 — as there seems to be no reason for retail investors to pay a sizeable premium over the market price. The factors in favour of investing in ONGC are threefold.
One, while a higher subsidy share (37.9 per cent this fiscal) on upstream companies remains a blot on ONGC's prospects, this has been a known factor since its December quarter results.
Over the medium term, ONGC's realisations stand to benefit from firm trends in crude oil prices and any further hikes in prices of controlled fuels.
Two, with the royalty dispute with Cairn India resolved in its favour, ONGC should also benefit from the expected increase in Cairn's output in the coming years.
Three, the stock's current valuations are cheap relative to global peers as well as historic levels. At Rs 290, the stock would discount ONGC's estimated current year earnings (consolidated) by around 9.4 times.
Finally, with the offer for sale underway, the overhang resulting from concerns about the government tapping into its cash reserves through other means (selective buyback, higher dividends) will abate.
Weighed against this, however, are the uncertainties surrounding ONGC's immediate prospects. On the crucial subsidy burden issue, the company's December quarter results did not inspire confidence with upstream subsidy share increased from around one-third to 37.9 per cent.
The company's domestic output too has been stagnating for quite some now. Overseas assets under ONGC Videsh do hold promise, but are subject to geo-political risks.
These factors suggest that investments in the stock will call for a 2-3 year horizon and moderate return expectations.