Some time back, we did a post on ONGC’s dividend history. Since, we hold this stock in our long term personal portfolio as well as Dead Monk’s Portfolio, we thought we could (or rather should) give it a deeper study. We were debating on how to go about it, when we came across a great post by Joshua (link) analyzing an investment in Starbuck’s IPO. We really liked the thoroughness with which the investment was analyzed. This prompted us to take a similar approach to evaluate ONGC.
Caution – This is a long and number intensive post.
ONGC’s IPO came sometime in first half of 2004. The prospectus is still available here. The price band was initially set as Rs 680 – Rs 750. And retail investors were offered a discount of 5%, i.e., shares were allotted to them at Rs 712.50 (non-adjusted as of today price). Retail category comprised of those who invested less than Rs 50,000. The proceeds of the share sale were going to Government of India and not ONGC.
This ONGC case study looks at following issues:
- What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period? We look at all aspects including capital appreciation and dividends.
- We also try simulating results of another approach where we make regular investment in ONGC’s stock over this 9 year period.
- We also look at how ONGC has increased its book value per share over these years and how it can be used to make decisions about when to enter this stock for long term.
- We also evaluated why the above approach might fail.
This is the first time we are trying to evaluate a company in this manner and would like to get your feedback and suggestions. Though this post took several hours, we think its result was worth it, atleast for us. J
What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period?
Suppose you had Rs 50,000 to spare in 2004. You decided to invest in ONGC’s IPO as a retail investor. The shares were sold at Rs 712.50 apiece to retail investors. You received a total of 70 shares (rounded for ease) for your investment.
First of all, after these 9 years, your 70 shares would have grown to 421 shares as a result of 2 bonuses (2:1 and 1:1) and a split (from face value of 10 to 5). At a market price of Rs 320 (at time of writing this post), your stocks would be worth Rs 1,34,737. To top it, you already know that ONGC is a generous dividend payer due to government’s mandate. This means that in past 9 years, you would have received 19 dividend payouts totaling a sum of Rs 30,035.
That means that between capital gains and dividends, your Rs 50,000 investment grew to Rs 1,64,772 in nine years. That is a compound annual growth rate of 14.17%. Compare this with Sensex journey from 5600s to 19500s, i.e. a compound annual growth rate of 14.87%. Not bad for a dull and boring company like ONGC when compared to glamorous Sensex. J
(Edited to add): The Sensex returns would be higher than 14.87% if we also consider the dividends issued by the constituent companies.
|Investment in ONGC IPO: Calculation of returns (including dividends paid in last 9 years)|
This also means that in less than nine years, ONGC has returned more than 60% of the initial investment as dividends (that too pretty regularly: 19 times)!! It is here that one can truly understand John D. Rockefeller’s feeling when he said – ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
|Dividends Paid in last 9 years & comparison with initial investment in ONGC’s IPO|
Note – John D. Rockefeller was the richest man ever. More than 10 times richer than the current richest man!! You can read about him and his company Standard Oil’s story here.
What a Rs 10,000 investment every quarter (3 months) in ONGC’s stock would have turned into over these 9 years?
This approach is born out of our interest in disciplined investing. Suppose you decide to invest Rs 10,000 every three months in ONGC’s stocks. This can be considered similar to having a regular SIP (Systematic Investment Plan) in mutual funds. This approach would have resulted in you investing Rs 3,50,000 in last 9 years. Result?
First of all, after these 9 years of quarterly investments, you would own about 1656 shares of the company. At, current market price of 320, these shares would have a value of Rs 5,30,077. Apart from that, these shares would have earned a total of Rs 73,828 as dividend income. That is, your total investment of Rs 3,50,000 has turned into Rs 6,03,906.
|Quarterly Investment of Rs 10,000 in ONGC during last 9 years: Analysis of total returns (including dividends)|
What has been the trend in Book Value per share for ONGC in last 9 years and how this data can be used to decide when to invest in the stock?
The company has been growing its book value at a decent 13.6% (CAGR) for last 9 years. The great thing about this growth is that it has been uniform, i.e., all yearly increases have remained in the range 11-15%.
|ONGC’s Adjusted Book Value Per Share (2004-2013) – (Note: 2013 book value is estimated)|
|ONGC Book Value Per Share & Annual Growth Rates|
The above trend shows that the company has been successful in increasing its book value over the years. You may question this as the book value can be rigged. Also there are much better parameters available for valuing oil exploration businesses But lets just delay that discussion for a while. So, now what we have at our hand is a company (ONGC), operating in a capital intensive business of oil exploration, which has consistently grown its book value in last nine years.
So, now if we consider a very simple ratio: Price To Book Value Per Share (P/BV), can we find some trend which can actually help us in knowing whether it is a good time to invest in ONGC’s stock or not? Let’s first look at the graph below:
|Price/Book Value Ratio: Lowest, Highest, Average – An indicator of when to enter the stock|
The blue line is a plot of P/BV ratios of ONGC’s stock over the years. As we can see, the lowest which it has ever reached is P/BV=1.62. The highest it ever went was in late 2007 when it hit 4.14. The average in last nine years has remained at 2.51. So, when the stock was trading in the band 1.6-1.7 in late 2012, it was one of the cheapest multiple (P/BV) at which the stock could have been possibly bought!! Nevertheless, government’s deregulation news pimped up the stock and now you can see the abrupt rise in blue line near the end of graph. The stock is headed towards its mean. And this is a historical pattern. Any stock cannot remain far off from its historical averages for long durations. There is always a regression towards the mean. As far as our personal portfolio is concerned, we bought a few ONGCs near Dec 2012, when it was available at one of its cheapest valuations ever. J So is this the right method to decide whether to buy a stock like ONGC or not?
Because there are many other factors which play an important role in deciding whether to purchase a stock or not. We look at a few which are relevant in this context.
Why the above approach should be taken with a pinch of salt? What are the possible loopholes in this approach?
A few immediate ones are as follows:
- The above approach relies entirely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
- Oil exploration companies like ONGC offer a unique problem of valuation due to their large value based on oil reserves. There is also a large uncertainty in many of the assumptions, such as value and quality of their reserves. So, unless and until this data is taken into account, a comprehensive analysis of oil stocks cannot be done.
- Other oil and gas specific metrics includes valuation based on barrel of oil produced per day, etc.
- The above book value based approach does not give any weightage to the management team (appointed by Govt. of India in this case). Experience is crucial and ONGC has loads of it. But with ageing oilfields and increasing complexity of newer projects like ones taken up by ONGC Videsh (& its Imperial Energy fiasco), this aspect should be given its due importance.
- Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other explorers like Oil India Limited and Cairn (India), which sometimes offer higher growth potential due to better reserve quality.
- Its common knowledge that most of ONGC’s oil fields are ageing and in no position to increase their output. Such questions on future growth potential, in wake of lack of new oil finds, can also be attributed to lower P/BV multiple being assigned to this stock in last year and a half.
Oil & Gas companies are generally complex to value because of above mentioned limitations. But they offer solid investment vehicles for safety of principle, long term growth and consistent dividend payments. The above approach uses just one parameter P/BV to evaluate the stock. You as a reader, should remember that this is just a case study. Real life is much different from case studies. One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.