Stock Review: ONGC

 

 

All analysts tracking it have a strong 'Buy' call on it, but that didn't prevent the country's largest oil producer ONGC from underperforming in the past three trading sessions even as overall equity markets recovered. It was ironic since the company had held its ground for more than a month when the overall markets were tumbling. Interestingly, it was the news of its long awaited follow-on public offer (FPO) that caused a selloff.

ONGC's FPO has been talked about for almost a year now and was postponed atleast twice before. In February '11 the company also issued 1:1 bonus shares and halved the face value to . 5 in a bid to make shares more affordable to retail shareholders. Still, the share price has not gone anywhere since then.

For investors, if an FPO is just round the corner, which in all probabilities will be priced at a discount to the market price, it makes little sense to buy the shares from open market. They would rather wait and buy in the FPO at the discounted price. This is what caused the 4.3% fall on Tuesday.

The investors have long been avoiding the company for more than last three months now. Since May 2011, the average monthly turnover in the ONGC scrip has been steadily declining. For August, the average turnover in the scrip was less than half of that in May. The price that the government sets for the FPO will be disclosed just a couple of days prior to the opening of the issue, which should happen sometime in September. However, that leaves little time to straighten out the key issue of subsidy sharing. Moving on to a formula-based subsidy sharing rather than the current ad-hoc system was considered essential for obtaining a better valuation at the FPO. In its absence, the government will have to settle for a compromisingly lower pricing.

Nevertheless, the second problem that needed to be fixed before the FPO has been solved favourably. The Cairn Group has indicated that it will submit to all the government covenants and share royalty burden with minority partner ONGC for the Rajasthan oil fields. This certainly has a positive impact on the ONGC's future earnings.

If the fundamental analysts held the company undervalued earlier, it is more so after the recent fall. A flat share price since February means even the potential benefits of reduced subsidy burden in Rajasthan haven't been priced in yet. In other words, ONGC's FPO has every reason to be successful whenever it opens.