Getting a little pregnantIt's a sign of the way the government works, that less than a week before various financial analysts start putting out their assessments of Indian Oil Corporation for its GDR issue next month, no one has thought it worth his while to tell IOC's top brass the price at which they will have to buy Bongaigaon Refinery and Petrochemicals Limited - as per the recommendations of the Nitish Sengupta report, stand-alone refineries like Bongaigaon were to be merged with larger players such as IOC, to be able to withstand the competition after the petroleum sector was fully opened up. Nor has anyone in government told IOC whether, and at what price, it will be allowed to buy over another stand-alone government refinery, Madras Refineries Limited, which Sengupta had also recommended be sold to either them or to Bharat Petroleum.Clearly, the government decision will have a big impact on IOC's financials - IOC, in fact, does not want to buy Bongaigaon unless it is offered the muchlarger Madras Refineries as well but its top brass is clueless as to the government's final view. Of course, if it is forced to buy Bongaigaon without Madras Refineries, IOC will just have to do so.Understandably, then, when IOC goes to the GDR market, to sell 10 percent of the government's holding in it, the prices that investors will pay for its share will be much lower than they would if there was more clarity about where the company was headed. Worse, there are several such issues which today remain unresolved, which will ensure a poor price for IOC's GDR issue. In other words, we're almost certain to witness a repeat of the GAIL disinvestment a few months ago, where the price got was so low that the government came in for a great deal of flak from almost everyone.The government has not, so far, shown any great commitment to lowering the subsidies on kerosene and LPG, nor has it kept to the schedule of reducing both excise and import duties in the petroleum sector. Phased reduction of subsidies,and of duties, however, were part of a plan which the government accepted three years ago, to fully deregulate the sector by April 1, 2002. In the event, investors cannot be blamed for not feeling that the complete deregulation of the petroleum sector may be delayed a bit. In which case, the profits of refining companies like Indian Oil will continue to be under pressure, and dependent on the vagaries of government policy. One corollary of the subsidies policy, for instance, is that oil companies have huge overdues from the government - for supplying subsidised kerosene, for instance - and that lowers their profitability.What's worse, the government has not even decided on what it plans to do with its stake in IOC. Does it want to, as, say, in the case of Indian Airlines, sell the company to a strategic investor? Or does it plan to just sell its stake to the general public, and let IOC become a professionally-run, board-managed company? Whatever route it chooses, clearly it needs to get out of IOC,and allow the company to run independently. Again, since investors don't know when IOC will be allowed to be run as an independent entity, chances are that their valuation of IOC's GDR will remain low for this very reason.If you want to figure out how badly this will affect IOC's GDR, all that you have to do is to look at the stock prices of various other oil and gas companies in other parts of the world. While Indian Oil's price-earning ratio (the P/E is the ratio of the share price to the earnings from the company's share) is a mere 6, that of global major BP-Amoco is 46, and it's 50 for Unocal in the US. In other words, investors fancy Unocal's potential so much that they are willing to price its share at fifty times the annual earnings from the share. Clearly, they're less enthused with Indian Oil, and price its share at just 6 times the annual earnings per share. Nor is this problem confined to Indian Oil, it applies to all state-owned oil firms. Bharat Petroleum's P/E is 4.5, ONGC's is 7.1, andGAIL's is 5. Contrast gas-major GAIL's P/E with 14.8 for Petronas in Malaysia, 50 for Enron, and 15.6 for Hong Kong and China Gas. Most of this is due to the fact that the oil sector is not fully open, and the government continues to run these oil firms - the privately-run Gujarat Gas, by contrast, has a P/E of around 30.Now the point here is that if the government continues to disinvest in companies like IOC, where its stake is currently 82 percent, in bits and pieces, it'll always get a lower price as compared to a disinvestment where it announces a clear time-frame in which it will free the firm. What's worse is that the government has followed this bits and pieces strategy in all the PSUs it has disinvested in so far it's raised Rs 18,000 crore in this manner so far, but has probably lost an equivalent amount by not selling the units as a whole, the way it did with Modern Foods last fortnight.Privatisation is a bit like pregnancy. Just like you can't get pregnant a little bit at a time, you can'tsuccessfully privatise in bits and pieces.
