Empowered Group of Ministers (EGOM) approved Oil India's divestment plan by selling a 10percent(%) stake through Offer for sale (OFS) on February 01,2013. The GoI is planning to raise around INR2500-3000crores as a part of its budgetary divestment plan of total INR30000crores. This 10% stake sale will bring down the government's holdings in the company to 68.43percent(%) from the earlier 78.43percent(%). 6.01crores of shares will be offered at a floor price of INR510/share to raise around INR3000crores.
We believe this OFS may provide a better platform for the investors to invest on the scrip as Oil India is a fundamentally sound company with virtually no debt in their books. Moreover it is a cash rich company with more than ~INR10000crores as per the last balance sheet and the government's move to deregulate diesel prices will act as a boon to the company as OIL India is one of those upstream company that has to bear the subsidy burden. With the gradual deregulation in diesel prices and capping of subsidized LPG to 9 per household will curb the underrecoveries and eventually the subsidy burden. Decline in subsidy burden may result in the improvement in the net realization ($/bbl) which is likely to impact the Oil India's earnings in a positive way. Besides the company probably allocate the cash (that has saved from relaxation in subsidy burden) in some productive manner.
On the valuation grounds Oil India possess a healthy Return on Equity (RoE) of ~20% which is expected to continue and if the deregulation of diesel prices is fully implemented we can expect a re-rating of their valuation multiple.
The government states that they are expecting more of overseas investors for the Oil India's OFS. 25% of the stake will be allotted to the AMCs as per the SEBI Mutual Fund Act.
If there is any change in policy from the government's end may count as the only apprehension regarding the stock.