Oil India - Should you apply ?

Oil India is coming out with an IPO to raise up to Rs 2,777 offering 2.4 crore equity shares. The price band is Rs 950-1,050.- should you apply ?

Business
The company is into E&P space and business model is similar to its bigger peer ONGC.
Company has primary assets in eastern India (assam, arunachal) and is more focused on being a onshore player rather than offshore. It has also selectively diversified across the oil and gas value chain by taking minority stakes in downstream businesses like refining, marketing and distribution. The oil gas mix is 60:40 compared to 90:10 for ONGC.

Financial and Valuation
Mcap = 20,333 crore to 22,470 crore
Mcap to sales =2.80 to 3.10
PE(based on FY09 EPS) = 9.13 to 10.07
PE (based on half yearly nos FY10) = 6.87 to 7.5
Cash on books = 6,100 crore
EV/2P = 3.6 to 4.1

Peer Comparison
OIL would trade at 3.6 to 4.1 x EV/2p which is at a discount to ONGC which is trading at 5.2x EV/2p. ONGC trades at 16 PE whereas OIL is at 10,the gap seems to be larger than justified.

Risks
1.E&P is the most risky business in the oil value chain however oil does not have a substitute till date and near future.
2. The price of crude is an unknown factor – if the price drops below $60 per barrel the business becomes nonviable (as told by ONGC chairman).
3. The subsidy policy of GOI is not yet clear and documented.Thus upside is capped until this policy continues.
4. Company is focused in one area – geographic risk.

Should you apply ?
Yes, I am convinced.The valuations are not cheap but not expensive either. Go for it at upper band, you may get modest listing gains but definitely it’s a business to be in for long term investors. We do not have many companies in this space and overtime GOI subsidy policy may be changed since oil bonds are not working out.The company is debt free and likely to have steady growth based on its reserves.