Author: shyam

Lessons from the ONGC fiasco

Oil and Natural Gas Corporation

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The government tried to auction off 5% of ONGC [stockquote]ONGC[/stockquote] on Thursday in what was supposed to be the door opener for its Rs 40,000 crore divestment target. The ONGC offer made up a big chunk (Rs 12,400 crore) of this target. It was so poorly managed that it required LIC to step in with Rs. 12,000 crores, almost half the amount, at the last minute to salvage the situation. Here are some real-world lessons that the common man can derive from this:

  1. Know when it’s a seller’s market and when it’s a buyer’s market. When the market knows that you are trying to sell stocks worth Rs 40,000 crores (~$8 billion) within the next couple of months, your are in a buyer’s market.
  2. Leave some money on the table so that investors brave enough to invest in a banana republic can actually make some money on the first day. The stock was trading at Rs. 275-280 levels when the auction price was announced. The reserve price was Rs. 290. It closed the week at Rs. 281.40. Auction investors are now staring at notional losses of Rs 1,000 crore.
  3. If you are arrogant enough to ignore #1 and #2, at least ask for hard underwriting from the investment banks who handled the process. Asking LIC to bail you out is like moving money from one government bank account to another. Now at some point in the future, LIC itself would need a bailout because of this.
  4. Know what you are selling. ONGC is a government slush fund for its stupid fuel subsidies. It shares 33% of the total subsidy burden and there’s no immediate hope that these subsidies are actually going to go down. ONGC should be making money as crude prices are going up but instead, its profits tanked 33% in the most recent quarter.
  5. Don’t look like a fool. There were “technical glitches” which resulted in “some” large orders to be rejected. Investors did not know the results of their bids even hours after the process had ended.

Is there anything that this government can do right?

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Weekly Recap

The NIFTY ended on a bearish note, melting down -1.60% for the week.
Biggest losers were DLF(-10.30%), M&M(-7.24%) and HEROMOTOCO(-6.97%). And the biggest winners were ACC(6.88%), AMBUJACEM(6.18%) and RELINFRA(5.38%)
Decliners eclipsed advancers 32 vs 18
Gold: -2.83%, Infrastructure: 0.90% and Banks: -0.18%
Daily news summaries are here.

The biggest news of the week was the Veritas report hammering DLF and the tepid response to ONGC’s divestment.

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Veritas: DLF should be at half of where it is trading today

DLF [stockquote]DLF[/stockquote] got hammered following a report from Veritas Investment Research. Key highlights:

  1. Current valuation seems to be based on an a rosy scenario about its ability to de-leverage its balance sheet as well as to generate cash flows from its operation.
  2. They do not have the execution capability, and they are unable to keep their promises.
  3. DLF is finding it difficult to execute on converting the land it owns into cash flow generating assets. DLF should be in the business of generating revenues and developing land and not in the business of holding land and selling it.
  4. The company wanted to be one of the largest in hospitality business in India and wanted to have 4000 rooms in operation by 2010 or 2011 and now their entire hotel business is up for sale. They keep on changing their plans and continue to not deliver in the marketplace.
  5. DLF might have to hold on to these assets for a much longer time period than it is perhaps guiding the marketplace. And may need to restructure loans and dilute equity to get out of the hole it finds itself in, given that it has negative cash flows of Rs 936 crore just this year.

Read more: ET, DNA, Hindu, VCCircle

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