Now, even local fund managers worry about IOC follow-on issue

Written by Pranav Nambiar | New Delhi | Updated: Dec 25 2013, 05:51am hrs
Taking a cue from the lukewarm response to the recent roadshows abroad for Indian Oil Corporations (IOC) 10% stake sale, existing domestic investors in the company have questioned the timing of the offer, reports Pranav Nambiar in New Delhi. The clamour to postpone the divestment by domestic investors who fear losses from the sharp plunge in the stock price since the sale was first planned three years ago comes on top of similar concerns raised by the oil ministry with the department of disinvestment (DoD). Sources said during the roadshows held in Mumbai and Chennai last week, domestic investors expressed the fear that at the current market price, the stock wont discover its fair value. The investors are worried that the beaten-down prices of the stock could leave them at a (notional) loss. The timing of the issue is not good as it should ideally be announced after passing reform steps like the diesel price deregulation, a senior official from one of the fund houses that has invested in the company said. The official said that the stock price stood at around R400 per share in 2010 when the stake sale was first thought of, against Tuesdays closing price of R211.75.

The domestic institutional investors in the company include UTI AMC, SBI Funds Management, Prudential ICICI AMC, HDFC AMC and L&T Investment Management, among others.

Sources said that some investors feel that if prices fall further to around Rs 180 levels, then the stake sale might invite the wrong kind of investors including hedge funds and speculators who are looking to make a quick buck rather than staying invested over the long term.

Others feel that the current revenue model for IOC is uncertain owing to the lag in subsidy compensations and the unclear roadmap for the deregulation of diesel, said sources. The delayed compensations have led to huge borrowings and interest burden on oil retailers. PSU oil retailers including IOC currently incur a loss of Rs 10.48 per litre on diesel, Rs 36.20 a litre on kerosene and Rs 542.71 per 14.2-kg LPG cylinder on selling the fuels below cost.

The IOC disinvestment proposal received tepid response during international roadshows across Hong Kong, Singapore, New York, Boston and London last month, with top fund houses showing little interest in the offer.

In a letter dated November 29 addressed to the DoD, the oil ministry wrote that the DoD may carefully consider the lukewarm investor feedback during the international roadshows before taking a final view on the proposed disinvestment and its timing. Almost all investors directly questioned the suitability and timing for the government embarking on disinvestment of a company like IOC at this juncture when it has a very low valuation and faces an uncertain revenue scenario, the letter mentioned.

The government plans to disinvest a 10% stake or 24 crore shares in IOC. At the current market price, the stake sale could fetch the government, the largest shareholder, around Rs 5,082 crore. This is way short of the Rs 10,000 crore that the 10% would have yielded in 2010 when the disinvestment was deferred owing to a low price of over Rs 400 per share.

Investors also added that the current valuation of around Rs 50,000 crore for IOC which owns 10 refineries and an upcoming mega refinery project in Paradip, over 11,000 km of crude oil, petroleum product and gas pipelines and over 35,000 marketing touch points does not reflect the fundamental value of the company.

Since January, the government has been regularly increasing diesel prices on a monthly basis by 50 paise. But a weak rupee has meant that the under-recovery on diesel has not fallen, standing at Rs 10.48 per litre now compared with 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 for 2012-13 stood at around Rs 1.6 lakh crore. Of this, diesel accounted for Rs 92,061 crore, LPG for Rs 39,558 and kerosene for Rs 29,410 crore. The overall under-recoveries are expected to touch around Rs 1.4 lakh crore this year.

Worries also remain over a possible shift to an export parity pricing model from the current trade price parity pricing methodology for petroleum products, despite the Kirit Parikh committee recommending against such a move. Also, the future roadmap once diesel is deregulated seems challenging as it would be difficult to compete against private refiners at its current gross refining margins.

Oil secretary Vivek Rae had in October said that his ministry preferred calling off the IOC roadshows as the timing was not right for disinvestment. He pointed out that the government needs to be careful not to sell stakes in its PSU jewels at low valuations in order to meet the Rs 40,000-crore disinvestment target for FY14.

With the disinvestment in Coal India also stuck due to trade unions protest and the Cabinet yet to take a call on the legal issues raised in the context of the plan to sell the governments residual stakes in Hindustan Zinc and Balco, a shortfall in the proceeds looks likely.