Analysis: Is the government selling MMTC for free?

It might appear that the government is selling its stake in MMTC almost for free after it announced to sell 9.33% stake in the company at 68% discount to its market price of Rs 190 a share. MMTC is classic case of market's irrationality and only confirms the fact that how inefficient markets are.
 
Besides MMTC, companies like Hindustan Copper, NMDC have faced such concerns in the past as well. In both these cases, the government had 99% stake before their issue hit the market. In the case of MMTC as well, the government holds nearly 99.33% stake.
 

Out of the 100 crore outstanding shares, only about 77-lakh shares are with the public. Due to the low supply and liquidity, the shares have historically traded at very high price irrespective of the company’s fundamentals.
 

In past as well such things have happened. Because of supply issue or due to lack of sellers in the market share prices tends reach to high. In fact shares are not available for trading and prices quoted on the exchanges is some time quite absurd because of the few sellers controlling the markets for the particular stock.
 
Valuation
 
Meanwhile, the government is looking to sell 9.33% in MMTC, resulting in an additional supply of 9.33 crore share in the market, which is far more than existing shares traded on the exchanges. More importantly, the government must be also be aware that if they have to sell such a large quantity, they will have to offer shares at a price at which most investors are willing to invest.

 
Fundamentally, at current market price stock is trading at 17 times its book value of FY12, which is significantly higher for any trading company. On the basis of market capitalisation to sales, which is about 0.31 times, this might look attractive at current price, but since it is a trading company it must be valued on the basis of earnings.
 
On the basis of FY12 earnings, the stock is currently trading at whopping 367 times. At these valuations there surely will be less response for the OFS (offer for sale), which is why it seems that the OFS is priced keep these issues in the mind. For instance at the offer price of Rs 60 a share, price to book value works out to 3.5 times, which is relatively far more reasonable.

 
In terms of earnings as well, the PE works out at 105 times of its FY12 earnings. This may still not sound attractive. This is because of poor financial performance in FY12. If we average the last five years profits and than calculate the PE, offer price is valued at 38 times, which much better. However, this does translate into a BUY recommendation for the stock.
 
Besides, the issue of valuations, one should keep in mind that MMTC is a trading company and lacks enough margins and consistency in financial performance. Its return ratio – return on equity (RoE) – was  just 5.41% in FY12.