- 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.
(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)|
|Dividends Paid in last 9 years & comparison with initial investment in ONGC’s IPO|
|Quarterly Investment of Rs 10,000 in ONGC during last 9 years: Analysis of total returns (including dividends)|
|ONGC’s Adjusted Book Value Per Share (2004-2013) – (Note: 2013 book value is estimated)|
|ONGC Book Value Per Share & Annual Growth Rates|
|Price/Book Value Ratio: Lowest, Highest, Average – An indicator of when to enter the stock|
- 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.