Pricing difference scuttles MMTC offer

Bankers suggest pricing the issue at a fraction of the current market price

The impending share sale of state-owned MMTC Ltd was deferred on Tuesday over wide differences between the government and bankers over pricing of the issue.

Sources said merchant bankers to offering, scheduled to open on Thursday, had recommended fair valuation of Rs 75 per share (translating into market capitalisation of Rs 7,500 crore) against the current market price of nearly Rs 300 (Rs 30,000 crore)

Bankers told the empowered group of ministers (EGoM) the current market price didn't reflect the true value of MMTC, which has a free-float of just 0.67 per cent. After the meeting, disinvestment secretary Ravi Mathur said the EGoM did not accept the recommendations of merchant bankers on valuation issues. (MONEY MATTERS)

The shares of MMTC had opened more than five per cent lower at Rs 280 on Tuesday, in anticipation that the government will price the offering at a discount to the market price. However, news of the deferment sparked short-covering, triggering a rally of as much as 13 per cent.

The MMTC scrip gained 7.17 per cent to Rs 317.70 on Tuesday on BSE, while the benchmark Sensex fell 0.41 per cent to 19,564.92.

The rebound caught many stock traders unawares who had short-sold MMTC shares. As MMTC shares are not traded in the derivatives segment, nor are available under the stock lending and borrowing mechanism (SLB), most traders had shorted the shares on an intra-day basis. While some traders managed to cover their short positions, a section had to buy back the shares at losses.

MMTC becomes the third state-owned company this financial year whose stake sales have been deferred. Earlier, the government had deferred Rashtriya Ispat Nigam Ltd’s public offering and National Aluminium Co Ltd’s offer for sale (OFS) on similar pricing and valuation concerns.

“MMTC pricing was not about discount to the market price. It was a case of repricing as the counter is very thinly traded and has very little free float,” said one of the bankers handling the issue, who didn't want to be identified.

The price to earnings multiple of MMTC, which is primarily engaged in the business of trading in metals and minerals, is nearly 200 times its trailing 12-month profits at the current market price of Rs 318 per share.

An analyst with a domestic brokerage, who also requested anonymity, said the fair price of MMTC was between Rs 50 and Rs 60 per share, translating into a market cap of Rs 6,000 crore.

“The company has clocked a profit of around Rs 100 crore in 2011-12. Even after factoring in its cash balance of about Rs 2,800 crore and investment of Rs 450 crore in various joint ventures and unlisted firms, the fair value of the company turns out to be at best Rs 6,000 crore,” said the analyst.  

The MMTC share sale will have to take place before August to achieve the minimum public shareholding requirement of 90 per cent. The government currently holds 99.33 per cent stake in the company.

The EGoM is expected to meet once again tomorrow to discuss the pricing for Nalco stake sale. The government is planning to launch the Nalco offering on Friday. The government has reduced the disinvestment target for this financial year from Rs 30,000 crore to Rs 24,000 crore. So far, it has raised about Rs 21,800 crore from disinvestments in companies, including NTPC and Oil India.