-Ruchi Agrawal Moneycontrol Research
- ONGC may consider listing of OVL, its international arm - Under pressure from government to buyback shares - Listing to potentially unlock value, though concerns over timing - Buyback to tighten capex plans
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State-run resource firm ONGC is holding a meeting today, where, according to media reports, it may take a call on undertaking a buyback and/or issuing a dividend. Also said to be on the agenda is the listing of its wholly-owned subsidiary ONGC Videsh Ltd (OVL).
The government has pressured ONGC to buy back shares, as the move will help bridge the fiscal deficit. According to reports, the company may issue a buyback to the tune of Rs 4,800 crore.
While the company has wherewithal to fund such a buyback – it had cash and liquid investments to the tune of Rs 11,428 crore as of March 31, 2018 – the hefty buyback amount could tighten the company’s planned capex.
An OVL listing will not only help raise funds for the buyback but also unlock value. OVL, whose reserves amount to 15 percent of ONGC’s total reserves, does not disclose detailed numbers separately. A listing will make disclosures better. Valuations for the company are arrived at based on estimates reserves of OVL.
But a listing for the company is not without its challenges. Analysts argue the recent sharp fall in crude prices has made an unfavourable time to list OVL, and that crude price above $8o would have been a better time.
Moreover, ONGC might also have to segregate the overseas assets of OVL and this might attract transaction costs and tax expenses which would be an added burden for ONGC.
The crude price fall has also raised concerns about the impact on ONGC’s revenues. The company management has argued that the current fall is not much of a concern for the company in the current year, as the average crude price for the year still remains above $ 65 per barrel. But sustained lower levels of crude might hamper the company’s top line and profits in the coming year.
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