“ ONGC FPO to be affected by Rs 14,000 crores subsidy burden”
Investors who would be busy tucking away their hard-earned money for the forthcoming ONGC market offering in Q1 2011 need to do a quick rain check on the company’s risk factors.
The ad-hoc subsidy burden that ONGC has to bear and the royalty payout on its Cairn assets may not only take off the icing on the scrip, but may leave a smaller slice of the cake too.
However, the degree of risk varies largely between the two factors. While the subsidy risk is swallowing away the company’s returns, the royalty issue is just a drop as far as its impact on the bottom line is concerned. Sample this.
In 2010-11, ONGC is estimated to shell out in excess of Rs 20,000 crore as its subsidy share for oil marketing companies, while it will be left poorer by only Rs 1,400 crore, because of the skewed royalty policy that governs its investments in the pre-auction Cairn blocks. In the latter, it is more a question of principle and business strategy.
“The market has already discounted the royalty obligation and is prepared for it. The same is not true of subsidies,” says Sanjeev Prasad of Kotak.
ONGC, India’s largest state-owned oil company will soon tap the capital market selling 5% of the government shares. Coming at the back of a bonus issue and a split share, the government could look forward to a hefty divestment cheque, provided it is willing to bite the bullet on deregulating diesel prices and putting in place a transparent subsidy-sharing formula.
The ONGC share was sold at Rs 750 a piece in 2004, the first time the government put its stake on the block. The scrip is now ruling at Rs 1,350, an appreciation of an estimated 74% in the past six years.
A cautious ONGC CMD RS Sharma, who has been lobbying hard with the government over both these risk factors, is hopeful that a solution will be in place by February. “We can’t assure the government of the best valuation for its stake if these issues are not resolved,” he told ET earlier this month.
ONGC may have to shell out an excess of Rs 20,000 crore as subsidies in fiscal 2010-11, if the current policy of sharing one-third the subsidy bill of oil marketing companies continues. The company is estimated to take a hit in excess of Rs 20,000 this fiscal under the present policy.
ONGC sold its oil at an average of $55.7 a barrel up to the first half of this financial year, when average oil prices were ruling at $80 a barrel. The average price of crude is expected to only firm up in the coming months, leaving ONGC with a lower realization, going forward.
“Any price above $70 a barrel works against ONGC under the current subsidy-sharing regime,” Sharma says. A case in point is how ONGC sales revenue from crude was at its lowest when global crude oil prices were at its highest, $147 a barrel in July 2008. Every time the global crude oil prices move up, the burden of subsidies increase proportionately and the margins come under pressure.
