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Oil India IPO Will Boost Privatization Drive


Oil India, the country's second largest oil and gas producer, has set the price range for its upcoming initial public offering, confirming that it is seeking to raise between Rs25.2 billion and Rs27.8 billion ($520 million to $574 million), sources said yesterday.

The price will range from Rs950 to Rs1,050 per share and the IPO will be open for subscriptions from September 7 to 10. The shares are expected to start trading by October 1.

The state-owned company is selling 11% of its enlarged share capital through the IPO and another 10% at the IPO price to three state-run refiners: Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum Corporation. The second sale will allow the company to raise a further Rs22.9 billion, based on an IPO price at the bottom of the range. The two deals will see the government's stake in Oil India fall to 78.4% from 98.1%.

The 26.45 million IPO shares are all new shares issued by the company, while the 24.1 million shares to be sold to the three refiners are existing shares currently held by the government.

This is the second government-owned Indian company to float on a domestic stock exchange this year and comes just a few weeks after hydro-power producer NHPC raised $1.25 billion through a highly popular IPO that ended 23 times covered. That stock is expected to start trading in the first week of September.

With similar support from the government as NHPC, Oil India is also expected to attract a lot of interest, although one India-based analyst who requested not to be named said he thought it was difficult to recommend investors to buy the shares above the bottom of the range. His caution stems from the fact that oil and gas producer Oil and Natural Gas Corporation (ONGC), which is also controlled by the government and is about 10 times larger than Oil India both in terms of production numbers and reserves, has historically traded at a price-to-earnings ratio of 10 to 11 times. Based on Oil India's earnings per share of Rs101 in the 2009 fiscal year (which ended on March 31, 2009), the IPO range values it at between 9.4 and 10.4 times.

"At the bottom end, the issue looks okay but as of now I wouldn't value it above 10 times," the analyst said.

However, at up to $574 million, this is not a large issue and it will need to be divided between qualified institutional buyers, retail and high-net-worth individuals. If it proves popular, the price may well trend upwards during the bookbuilding.

Among the uncertainties, analysts say, is whether Oil India will be able to keep up the production growth that it has shown in past years—there is talk that it is planning to expand production by 4% to 4.5% over the next two to three years, but so far there has been no official confirmation of that. If this was indeed to be the case, it would give Oil India an edge over ONGC, whose production has been largely flat in recent years.

Because government-controlled upstream companies, like Oil India, need to bare part of the end customer subsidies on refined products such as kerosene, petrol, diesel and cooking gas, there is also very little earnings visibility. According to analysts, there has been some talk that the government may rationalise this subsidy sharing.

Aside from its onshore domestic exploration and development, Oil India is also exploring for crude oil and natural gas in Gabon, Iran, Libya, Nigeria and, as part of a consortium, in Yemen. As of the end of March 2007, the company had estimated independent proven and probable crude oil reserves of approximately 539.7 million barrels, and 46.04 billion cubic meters of proven and probable natural gas reserves, most of which are located onshore in the states of Assam and Arunachal Pradesh.

Citi, HSBC and JM Financial/Morgan Stanley are joint bookrunners for the IPO. JM Financial and Morgan Stanley are acting as one entity as this is a legacy deal from before the former partners decided in early 2007 to go their separate ways. That in itself is also a clear indication of how long this IPO has been in the works. Oil India filed a draft prospectus with the Indian regulators in December 2007, but the IPO was put on hold when the equity markets became increasingly challenging over the coming months, forcing several companies to pull their listing attempts because of a lack of demand.

So far this year there have been seven IPOs in India, raising a combined $1.9 billion, which compares with $4.3 billion raised in 2008 and $8.1 billion in 2007.

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