IOC roadshows see less than lukewarm response

Written by Pranav Nambiar | New Delhi | Updated: Nov 27 2013, 10:59am hrs
Unless state-owned Life Insurance Corporation comes to the rescue, Indian Oil Corporations (IOC) R4,824-crore share sale could come a cropper. IOCs roadshows across the globe Hong Kong, Singapore, New York, Boston and London have seen a less-than-lukewarm response with investors concerned about mounting losses in the wake of the governments inability to control runaway fuel subsidies. At Tuesdays closing price of R201 per share, IOCs 10% stake was worth R4,824 crore.

Sources said top fund houses including T Rowe Price, Schroeder, Aberdeen, JPMorgan, Templeton, Wellington and Jardine showed little interest in the IOC offer. Some did not even give the Indian delegation an appointment to discuss the offer. A few hedge funds and small fund houses showed interest in the offer but none of them were big names, the source, who participated in the roadshows, said.

Other investors like the GIC met the delegation more as a courtesy call, sources said. As many as 19 investors in Hong Kong and Singapore and about 17 in the US are understood to have been approached. The government had earlier reportedly called off a roadshow in Dubai owing to low investor appetite.

Among other big-ticket divestments this fiscal is a 10% stake sale in Coal India estimated to fetch R16,000 crore. While opposition from trade unions has forced the government to reduce the sale to 5% of the companys equity, a similar amount could come from a share buyback by CIL. The modalities of this have not yet been settled.

The R14,000 crore to be got by the residual stakes in Balco and Hindustan Zinc has got stuck in a dispute over whether Parliaments approval is required for selling the HZL stake since the company was formed through an act of Parliament.

In which case, the government may have no option but to sell a part of the shares of ITC, Axis Bank and Larsen & Toubro, held by SUUTI and valued at roughly R40,000 crore. So far this fiscal, just R1,325 crore has been raised through disinvestments.

Investors feel the current revenue model for IOC is uncertain owing to the lag in subsidy compensations and the unclear road map for the deregulation of diesel.

Delayed compensations have led to huge borrowings and interest burden on oil retailers. Oil retailers including IOC currently incur Rs 9.58 per litre loss on diesel, Rs 35.77 a litre on kerosene and Rs 482.50 per 14.2-kg LPG cylinder.

Since January, the government has been increasing diesel prices by 50 paise every month. But a weak rupee has meant that the under-recovery on diesel has not fallen, standing at Rs 9.58 per litre now as compared to Rs 9.28 per litre in January. At current prices, IOC is expected to end the fiscal with total under-recoveries of Rs 71,200 crore.

The overall under-recovery bill of IOC and the two other state-run oil retailers BPCL and HPCL stood at around Rs 1.6 lakh crore for FY13, of which the under-recovery on diesel was estimated at Rs 92,061 crore, LPG at Rs 39,558 and Kerosene at Rs 29,410 crore. The under-recoveries are forecast to touch around Rs 1.4 lakh crore this year.

Worries also remain over a possible shift to an export parity pricing (EPP) model from the extant trade price parity (TPP) pricing methodology for petroleum products, despite the Kirit Parikh committee opposing such a move. Also, the future roadmap (once diesel is de-regulated) seems challenging as it would be difficult to compete with private refiners at its current gross refining margins (GRMs).

Before the IOC disinvestment offer in mid-December, some roadshows are expected to be held in India as well to attract domestic investors. The bankers to the offer include SBI Cap, HSBC, Citibank and JM Financial.

JP Morgan has an underweight rating on the stock. With softness in GRMs persisting and inflation/elections likely to slow reform, we are cautious on names with policy leverage and retain our UW rating on IOCL, the brokerage wrote recently. The firm observed that reliance on reform/compensation continues and and with the pace of reform unlikely to pick up in 2H, leverage to policy should continue to weigh on earnings.

In the three months to September, IOC reported a profit of Rs 1,680 crore led by higher than expected subsidy compensation from the government and better than expected refining margins of $6.62 per barrel compared with $1.67 per barrel in Q1FY14, led by inventory gains. IOCL received Rs 9,240 crore as compensation for subsidy losses from the government, substantially higher than estimates. However, IOCL reported a loss in H1FY14, large due to the Rs 1,630 crore of subsidy losses that have not yet been compensated.

The stake sales that have concluded so far this year are that of MMTC, Hindustan Copper, National Fertiliser, ITDC, State Trading Corp and Neyveli Lignite. Disinvestment plans are firmed up for PowerGrid, NHPC and Engineers India.