Balco Divestment Move Raises Brows

The governments decision to divest 40 per cent in aluminium major Balco leaves a number of questions unanswered.

Senior company sources point out that with its decision to offload 40 per cent stake the government has only decided to implement a part of the disinvestment commissions recommendations while choosing to ignore the other recommendations.

Following the government decision, the ministry of steel and mines has invited bids for a global advisor to undertake the strategic sale or part disinvestment of the government stake in the Rs 760-crore company.

The next meeting to decide on the matter is due to take place today.

 

The global advisor would be responsible for assessment and valuation of the aluminium major and would suggest measures for enhancing the sale value.

The disinvestment commission in its report had mentioned that the government would need to consider the desirability of capital restructuring by converting at least 25 per cent of the equity into long term debt given the over capitalisation in the company.

However the capital restructuring plan for Balco prepared by SBI Capital Markets and submitted to the government nearly six months ago is gathering dust.

Meanwhile, the Union cabinet decided to offload 40 per cent of the government stake to a strategic partner to ensure modernisation and expansion of the company following the recommendation of the commission.

At present the government holds the entire stake in Balco.

SBI Caps had proposed capital restructuring through conversion of 50 per cent of Balcos existing equity base of Rs 488.85 crore into a government loan, carrying an interest rate of 8.5 per cent.

The sources added, the restructuring of the equity is an essential prerequisite before the government disinvestment since the large capital base is responsible for the Balco stocks low earnings per share (EPS) of 3.33.

The disinvestment commission had also recommended that in order to improve the companys profitability, it would be necessary to take steps to shed the surplus labour force, particularly in the Bidhanbagh unit, with an acceptable VRS.

The sources said the report mentions that the companys internal generation is more than satisfactory and all diversification projects it was considering implementing could be financed through the same and be supplemented by market borrowings.

Balco is cash rich, having Rs 300 crore worth of funds, to carry out its capex plans and does not require a strategic partner to bring in funds, they said.

Balco has a Rs 1,000 crore capex plan in the Ninth Plan including adding a new cold rolling mill, modernisation of smelter operations and hiking the capacity of the captive power plant.

It has a low debt, roughly Rs 48 crore, whereas its networth is around Rs 800 crore, giving it a low debt equity ratio.

The governments decision to choose a strategic partner, who will assist the company in modernisation also makes little sense, according to sources. This is because Balco uses an older technology, the Sodeberg process, for reduction of alumina into aluminium.

The commission stated improvements if any in the technology will be gradual and can be sourced from other countries. The sources questioned the wisdom of choosing a strategic partner who will help in technology in the light of the above statement.