The decision to buy stake in Indian Oil Corp will leave ONGC with only Rs 2500 crore in its cash reserve, ONGC’s Director, Finance Aloke Kumar Banerjee told CNBC-TV18 Monday. The company had a cash balance of over Rs 13,200 crore at the beginning of the year, he said. He does not think buying stake in IOC at this point is a bad idea.
Following a weak response to the proposed divestment in IOC, and also opposition from the oil ministry on selling stake at depressed valuations, the government has decided to ask state-owned companies ONGC and OIL India to pick up stake in IOC. This is being done so as to enable the government to raise cash to bridge the fiscal deficit and meet the 4.8% target for the year.
The move has drawn criticism from the stock market, as it is seen hurting the capex plans of OIL and ONGC.
Below is the verbatim transcript of Aloke Kumar Banerjee's interview on CNBC-TV18
Q: How was the split for Oil and Natural Gas Corporation (ONGC) and Oil India in terms of purchase of Indian Oil Corporation (IOC), has that finally been decided how much will ONGC have to purchase, will it be 5 percent?
A: We still have to receive any final communication but yes it is most likely to be 5 percent that is the intimation we got informally. So far we have not received any communication from the government.
Q: Wanted your comment on this issue of subsidised cylinder being hiked from nine to 12. The IOC management tells us that Rs 5,700 crore would be the total hit. And in a scenario where the government is looking at maintaining its fiscal deficit, are you worried that this entire Rs 5700 crore additional subsidy is going to be put up on you and Oil India?
A: It is very difficult, the decision from 9 to 12 also when to implement is yet to be notified. If we say this is happening – the subsidy also so far we have been following that USD 63 per barrel that is the subsidy formula we have been following for the last about two years. So don't know whether it will be any additional - what way they will be doing it that has not been confirmed.
Q: Will your dividend burden fall this time at least because you are purchasing IOC shares you may not have to pay that much dividend to the government, any likelihood?
A: No I don't think so. We are maintaining almost the same level of dividend as last year, atleast that is what we are anticipating but it will depend upon the board decision. We don't think IOC’s purchase a bad buy at this point of time. And although we are not having much cash returns but still we feel that we can pass the money for sometime, there is no locking period also. So it may not be a bad buy for ONGC at this point of time.
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Q: How much cash would you actually have to part with and since you were telling that it could be 5 percent between you and Oil India what would the exact cash be that you would have to part with?
A: We started the year with about Rs 13,200 crore and we are aiming for Rs 4000-5000 crore this year. And suppose this transaction happens then about Rs 2400 crore we would be paying for this 5 percent share. So the year will be ending instead of Rs 5000 crore at Rs 2400-2500 crore.
Q: But you do have some of your own acquisitions for which you have to use this cash as well so is there a possibility of the company actually becoming a net debt company?
A: Till now we have no debt as such, the parent company ONGC we have no debt but as a group company we have some debt because our 100 percent subsidy OVL has some debt. So next year for our domestic investment may be that margin may need some cash or may not. We have already issued some bonds.
Q: How come you are saying that IOC is a good place to keep your money? In the last 10 years you have not sold off that stock despite some handsome bonuses, wasn’t there ever any decision contemplated on cashing out?
A: IOC in fact for the last quite a few years we have that holding. Now if you see there has been quite handsome appreciation of our investments. We are keeping it, anytime we can use it. At this time if you see last about one year pricing also IOC, from that point of view also it is quite a good buy.
Q: The holdings that you have since 1990’s if you had invested that money in even may be Nifty or may be even some bank deposits, right now may be there is a good chance that you would have been sitting at higher money than what you are sitting on right now. IOC stock has been a rank under performer in a big bull market over the last 10 years or so. What makes you confident that this time it is a good buy at current price?
A: If you see the last 10 years even whatever investment we made and subsequently whatever we have got and today if you sell those shares there is quite a good return there. Secondly if you see the last one year IOC share how it has behaved, there also the present purchase it is not a bad buy.
Q: Are you likely to be more active in cashing out of IOC?
A: Yes. Last time we had lot of cash, but now we may require cash but it all depends on gas price increases. If something happens then we can bank on this investment.
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