I am not a fan of IPOs. I do not consider them an attractive opportunity for my investment objectives. In general, companies or organization come to the market with IPOs to generate capital. Their objectives are to generate as much capital as possible with minimum possible dilution. Companies usually choose opportune time frame to offer it to open public so that sufficient premium can be added to fair value (or book value). I do not find fault with the company. They are doing what they are supposed to do. They are attempting to meet their objective to get maximum possible value from the market.

Everybody will have an opinion which is perfectly acceptable. The broking world says “buy it for long term”. Retail market sentiment says buy, buy, and buy. However, I am not buying it. I am giving it a pass. The key question here is what is in there for me as an investor?

• First, I am already exposed to oil and gas sector in my portfolio. Buying Oil India will over expose me to one sector. While believe Oil India is a good company and worth investing, but over allocation in a given sector never a good idea. If oil and gas sector performance improves for whatever reason (such as pricing regime change, market pricing of oil, etc), then I will get the benefit because of my current allocation to ONGC.
• Second, I believe the shares are a tad higher than I would initiate a buy. My rough estimate based on earnings, dividends, and book value would be in the range of Rs 800 to Rs. 900. This is the fair value price range for me to buy (assuming I am interested). The shares are being priced in the range of Rs 950 to Rs 1050 which is higher than I would be willing to pay. The IPO offered price has 10 to 12 PE ratio, 2.0 to 2.3 of book value, and has close to 3% dividend yield. This would tend to suggest that it is priced to buy.
• Third, assuming if this generates interest for me, I will have to sell my partial winning position in ONGC to buy Oil India. It may be a good reallocation strategy to diversify my positions, i.e. to take something out of winning position and buy something else. However, selling winning position and buying at fair value is not justification enough to make the move. If Oil India shares were in my fair value buy range or below, then reallocation would make sense.

Now you know why I am giving it a pass. Although it is approximately one tenth of the size of ONGC, I believe Oil India is a very good company. It has good profitability, good financial management, good operative history, good future prospects, and pays good dividends. Long term investors who are not exposed or lack oil and gas shares in their portfolio can think of initiating a small starter type of position.

IPOs in India, Oil India IPO, Oil India Ltd IPO, ONGC