ONGC stake sale: Subsidy burden gone, Centre eyes disinvestment

By: | Updated: September 27, 2016 7:21 AM

The government is understood to be re-evaluating the sale of a 5% stake in ONGC now that the oil and gas explorer will not bear any part of the subsidy burden arising out of under-recoveries from the sale of fuels.

 

The government has so far raised R3,183 core in 2016-17 via disinvestments in NHPC and the sale of shares in Indian Oil and NTPC to their employees. (Reuters)The government has so far raised R3,183 core in 2016-17 via disinvestments in NHPC and the sale of shares in Indian Oil and NTPC to their employees. (Reuters)

The government is understood to be re-evaluating the sale of a 5% stake in ONGC now that the oil and gas explorer will not bear any part of the subsidy burden arising out of under-recoveries from the sale of fuels. Officials privy to the developments told FE the sale could take place as soon as “the third quarter of the current financial year”. The disinvestment already has the approval of the Cabinet.

At current prices, the stake sale could fetch the government in excess of R11,000 crore. On Monday, the ONGC stock lost 3.84% to close at R250.50 on the BSE. The Sensex fell 373.94 points to close at 28,294. 28. Between April and now, the ONGC stock has rallied 21% against a 13% gain clocked by the benchmark gauge.

Should the sale go through, the government’s shareholding in the upstream oil company would fall to 63.93% from the

current 68.93% and it will have moved closer to its FY17 disinvestment target of raising R56,500 crore. While R36,000 crore is sought be mopped up throughstake sales in public sector undertakings, another R20,500 crore is to be raised from strategic disinvestment.

The Maharatna has been on the government’s disinvestment radar for some time now. In late 2014, roadshows were held in some cities overseas but the proposed issue did not receive an enthusiastic response from investors who were concerned about the quantum of subsidy to be borne by the company. This time around too the government is treading carefully, not wishing to miss the disinvestment target yet again.

The government has so far raised R3,183 core in 2016-17 via disinvestments in NHPC and the sale of shares in Indian Oil and NTPC to their employees. The department of investment and public asset management will be looking to come up with at least one big-ticket offer for sale or IPO although a slew of buybacks is expected to bring in a chunk of non-debt capital receipts of an estimated R13,000 crore. More than a dozen companies have been asked to buy back shares to the extent they can by an amount equivalent to 25% of the aggregate of their fully paid-up share capital and free reserves. At the end of March 2015, CPSEs had surplus cash of about R2.55 lakh crore.

Analysts are not overly bullish on the stock although a rise in crude oil prices, they point out, would boost the firm’s profits.

Kotak Institutional Equities expects the company to report revenues of R1.34 lakh crore in FY17 and a net profit of close to R17,500 crore. After the earnings announcement for Q1FY17, the brokerage estimated a fair value for the stock of R230.

Meanwhile, prices of Brent crude oil have risen 17.5% since April 1 and are currently ruling at $46.60 per barrel. After freeing prices of petrol in FY11 and diesel in FY15, the Centre picked up the entire subsidy on domestic cooking gas from FY16. Starting this year, government officials indicated, it will also bear the cost of subsidising kerosene sold via the public distribution system. The subsidy burden of upstream oil companies has seen a huge decline from 56% of the total under-recoveries in FY15 to 7% FY16. The Budget for FY17 provides R26,947 crore for fuel subsidies: R19,803 crore for LPG and R7,144 crore for kerosene.

The budgeted outlay, sources said, would more or less suffice to meet the actual subsidy requirement, although the government may have to find a few thousand crores to pay off the arrears from the previous fiscal. Of course, there was the option of rolling over a small amount without affecting the fiscal maths, they added.

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