A week-long road show (November 17-23) has begun for the sale of 5% stake by the government in ONGC under the disinvestment programme for the current financial year. The oil explorer is first off the block in the planned sell-offs which are targeted to generate R58,000 crore that would be crucial to the government for adhering to the 4.1% fiscal target. Coal monopoly CIL and hydropower major NHPC are the other companies on the disinvestment radar.
The Cabinet Committee on Economic Affairs has approved disinvestment in the three PSUs, which is expected to fetch the government R44,000 crore. The balance will be mopped up by selling the government’s residual stakes in non-government companies such as Hindustan Zinc and Balco.
The government’s sell-off programme fared poorly in FY14 owing to unfavourable market conditions. Only R15,819 crore could be mobilised through PSU stake sales against a target of R40,000 crore. But since then market has improved significantly, raising hopes that planned sell-offs will sail through. However, the government has yet to test the waters.
The upcoming stake sale in ONGC assumes added significance because it is expected to set the tone for other sell-offs that will follow.
The government has shown its determination to reform the domestic energy market by hiking the natural gas price by 33% and decontrolling the retail sales of diesel, which bolstered investor sentiments in companies operating in the sector. But it has balked at politically difficult reforms like phase-out of subsidy on LPG cylinders and kerosene oil. Since these subsidies have to be shared by ONGC, this aspect could weigh on investors’ mind, according to analysts.
But that aside, ONGC’s fundamentals remains strong, with the oil explorer maintaining a reserve-replacement ratio (RRR) of more than 1%, which means it is adding reserves at a faster pace than its production rate. RRR is a key parameter used by industry consultants to assess value of an upstream oil company.
The company earned a gross revenue of R84,201 crore in the FY14. It earned a net profit of R22,095 crore despite paying discounts to the tune of R56,384 crore to oil marketing companies towards its subsidy sharing liability. However, the majority of ONGC’s oil fields are old where production is stagnating or declining. The company is implementing projects to slow production decline in these fields. However, according to industry experts, there is a limit to such technological measures. The company has also been slow in starting production from its explored fields, which could have offset the output drop in ageing blocks.
The PSU continues to invest in exploration and production at a healthy rate. It invested as much as R1,42,899 crore during the last five years. ONGC subsidiaries ONGC Videsh and MRPL are doing well.
ONGC has also forayed into petrochemical and power generation businesses through its ventures like ONGC Petro-additions, ONGC Mangalore Petrochemicals and ONGC Tripura Power Company. According to ONGC, it is also studying the feasibility of setting up a gas-based fertiliser plant in Tripura. Meanwhile, the company has signed a pact with Mitsui and BPCL to start the LNG business.
The success of the disinvestment programme will also depend on spacing between sell-offs and market liquidity. If stakes sales get bunched or if liquidity rules low when the offers hit the market, investor response could be less enthusiastic than expected. Devendra Kumar Pant, chief economist at India Ratings, told FE: “Achievement of the fiscal target will depend on the success of the disinvestment programme. Clubbing of sell-offs could create liquidity issue and impact the call market.”
By Noor Mohammad