Investors can give a skip to the Government’s offer-for-sale of Oil India shares, which opens on Friday. The risk of higher under-recovery burden on upstream companies in the near-term and possible weakening of the Government intent to continue with fuel price reforms in a changing political scenario are reasons for caution.
Reasonable pricing
Sure, the valuation in the offer-for-sale seems reasonable. The floor price of Rs 510 a share is at a 5.4 per cent discount to Thursday’s closing price of Rs 539. Also, at around 8 times trailing 12-month earnings, the asking price is lower than levels the Oil India stock has traded at in the past (around 10 times), and cheaper than bigger peer ONGC.
Oil India has exhibited better output growth than ONGC in recent years.
That said, with the Government keen to rein in the fiscal deficit in FY-13, Oil India along with ONGC and GAIL may have to bear a higher portion of the fuel subsidy burden this fiscal (it was around 40 per cent in FY-12). This could prove a drag on the Oil India stock, which has gained more than 23 per cent over the past month and half.
The recent strong run in public sector oil stocks was owing to the baby-steps allowed by the Centre to increase diesel price. The Rangarajan Committee’s recommendations on increasing domestic gas price also helped sentiment.
But it remains to be seen whether the oil marketing companies will be able to follow through with the envisaged marginal price increases in diesel over the course of the next year. Their hands may be tied by the Government in the run-up to next year’s elections. Past experience regarding trouble in hiking price of petrol — a decontrolled fuel — does not inspire much confidence.
anand.k@thehindu.co.in