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ONGC stake sale to face subsidy hurdle

A motorcyclist drives past empty stacked oil drums in Cochin, India, on Friday, May 29, 2015. Prime Minister Narendra Modi is counting on a revival in credit to accelerate growth in Asia's third-largest economy after the RBI cut its benchmark interest rate three times this year. Photographer: Dhiraj Singh/Bloomberg

By BLOOMBERG

MUMBAI • India’s efforts to sell a US$1.6 billion (RM6.64 billion) stake in Oil & Natural Gas Corp (ONGC) has run into concerns that government policies on fuel pricing would weigh on the state-run explorer’s share price, according to people with knowledge of the situation.

Investors and fund managers that met with Indian government officials during a US roadshow last month voiced concern that the government may reimpose fuel subsidies and that the nation’s state-set natural gas prices are too low, said the people, who asked not to be identified as the discussions were private.

The tepid response may further set back Prime Minister Narendra Modi’s plans to raise 800 billion rupees (RM45.65 billion) by selling holdings in state-run companies during the fiscal year ending in March. His government has only been able to pull in about 92 billion rupees as of July 5.

The 5% ONGC stake being marketed would be worth about 112 billion rupees as of yesterday’s closing price.

Shares in the company have declined about 10% so far this year, while cash reserves have shrunk after it paid a record dividend and bought the administration’s stake in a refiner.

In contrast, the benchmark index has rallied about 12%, making it Asia’s best performer, while Brent, the benchmark for half the world’s crude, has climbed about 16%. ONGC’s price-earnings ratio lag that of global peers such as BP plc.

ONGC shares closed 0.5% higher at 174.5 rupees in Mumbai, while the benchmark index ended with gains of 0.6%.

Rising crude prices coupled with the depreciation of the rupee is straining the government’s subsidy budget, ICICI Direct Research analysts said in an Aug 3 note. The government’s lower provisions for subsidies could lead to the possibility of ONGC sharing that burden, limiting the benefits of higher crude prices.

When fuel prices were set by the government, the explorer would share a portion of the subsidy burden by selling crude to refiners at a discount to compensate them partially for the loss in revenue. ONGC along with Oil India Ltd has paid for over 40% of the country’s annual subsidy bill, Moody’s Investors Service analyst Vikas Halan said in a note in May.

That ended when the government freed up retail prices of petrol in 2010, followed by diesel in 2014.

The government continues to control prices of kerosene and liquefied petroleum gas (LPG). The 208 billion rupees provision for kerosene and LPG subsidies in the year ending March is “clearly inadequate”, Jefferies India analysts led by Somshankar Sinha said in a note last month.

The pattern of price changes by state-run refiners have also led to speculations that they may be influenced by political issues. Earlier this year, refiners didn’t change retail fuel prices for three weeks, despite higher international crude costs, and increased them only after elections in a southern state key to Modi’s coalition ended.

Record high pump prices of petrol and diesel are also stoking fear that the government could bring back controls to rein in prices ahead of Modi’s re-election bid early next year.

“For state upstream companies like ONGC, the perpetual uncertainty pertaining to subsidy-sharing” resurfaces during periods of high crude prices, the company said in its annual report for the year ended March.

ONGC also said it is incurring “significant” losses due to low domestic gas prices, which are below the company’s cost of production.

The government holds about 67.7% in the explorer followed by stateowned Life Insurance Corp’s 9.2% stake. Two other government-owned companies Indian Oil Corp and GAIL India Ltd own about a combined 10% stake in ONGC.