A discounted offer price was perhaps a key reason behind the success of the Oil India Ltd offer for sale. This was in contrast to the Oil and Natural Gas Corp. Ltd (ONGC) issue, which asked for a premium and wasn’t too well-received.
But the discount may not have been the only reason. Investors may also be looking more favourably at the petroleum sector with the government making all the right noises as far as fuel sector reforms are concerned.
Sure, there is a section of analysts who continue to be sceptical about the implementation of the graded and regular increase in diesel prices. Nevertheless, if the implementation is smooth, under-recoveries for the sector would reduce. That would naturally be positive for Oil India given that it bears a portion of the subsidy payable to the state-owned oil marketing companies.
Whether the price increase goes through fully remains to be seen. Investors also seem to be kicked about the potential increase in domestic gas prices. Oil India is expected to be a key beneficiary of higher domestic gas prices. Consider this: in the last financial year, the contribution of gas to the total revenue stood at 10%. A positive development on that front, if any, is expected to improve valuations and earnings considerably.
Analysts maintain that Oil India valuations are relatively cheaper than that of peer ONGC. According to Angel Broking Ltd, on the valuation front, Oil India is trading at 3.5 times enterprise value to 2P (proven and probable) reserves compared with ONGC, which is trading at 4.7 times.
The Oil India stock has not really appreciated much so far in this fiscal year and has increased by just 2%. At the current market price, the Oil India stock trades at around 7.7 times its estimated earnings for the next fiscal year. Sure, valuations appear undemanding at these levels. The company’s balance sheet is also cash rich. While the sector outlook has improved, if the government decides to increase the subsidy sharing component for the upstream companies, then it will have a negative effect on sentiment.