Pricing disinvestment

Govt should get real about its expectations from PSU stake sale

The government may have deferred the proposed stake sale in the state-owned mineral trading company MMTC Ltd over valuation differences with merchant bankers, but it would do well to recall the debacle associated with the share sale of the state-controlled oil company ONGC last March. On that occasion, the government priced ONGC's shares at Rs 290 each; institutional investors saw little value in bidding for them at that price - higher than the market price that was prevailing then. The government had to ask the Life Insurance Corporation of India to bail out the issue. On this occasion, the government was told by the merchant bankers that Rs 75 a share was a fair price for MMTC. However, the market price is over Rs 313 a share as of closing on Wednesday, and the government thus chose to defer the issue.

However, rather than getting carried away with the wide gap between the market price and the fair value assigned to the company's shares by merchant bankers, the government should note that the current stock price of MMTC Ltd is produced by market dynamics - but with constrained supply. Only 0.6 per cent of the stock is freely floating. True, given this, volumes are not small. But the bankers argue the market price is skewed anyway. Typically, a company's institutional ownership is disclosed by companies where the holding is over one per cent. The moment a stock's free float increases or, in other words the shareholders base increases, it gains momentum and price discovery happens. NMDC, a state-controlled mining company, is a case in point - it has, for the first time, entered a global index (FTSE Emerging Market Index) after its free float increased in December 2012. In addition, while MMTC was trading at close to Rs 800 a share a few months ago, it is to be remembered that it has few assets of its own. It is a trading company, and a relic of a dirigiste past that will inevitably be blown away. It closed 2011-12 with net sales of Rs 66,324 crore and it purchased goods worth Rs 65,166 crore, and a net profit of Rs 70 crore. The first nine months of this year have seen net sales of Rs 21,533 crore and a net loss of Rs 70 crore in the same period. Though the company is sitting on cash balances of Rs 2,948 crore on a consolidated basis, it is unlikely to merit sky-high valuations. At the current market price, the 12-month trailing price-earnings multiple of the company is 190 - difficult to explain for a company with such a business profile. The government should recognise that this might be the case for several state-owned companies it intends to sell, not just MMTC.

Given these considerations, it is not surprising that the stock issues that sailed through earlier this year (Hindustan Copper, NMDC, OIL and NTPC) were priced at the levels at which institutions saw value - and even so, Hindustan Copper's had to be bailed out by LIC and SBI. Timing is also critical. Thanks to careful pricing and LIC, the government may even achieve its scaled-down disinvestment target of Rs 24,000 crore for the current fiscal year. Next year's target is more ambitious, and it is not easy to see how it will be achieved if the markets expect discounts for many of them. True, markets are skittish currently; there are no real triggers for an upward move, unless interest rates are cut by the Reserve Bank of India. So the chances of an issue sailing through after a rate cut are far higher than an issue closing successfully this week.