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IBP: To bite or not to bite

Feb 13, 2002

The disinvestment of Videsh Sanchar Nigam Ltd. (VSNL) and Indo-Burmah Corporation (IBP) whistled the start to what seems like the San Fermin festival -- Spanish bull run. Since the announcement on Tuesday, February 5, the BSE Sensex has gained by 5.4% with oil sector PSU stocks on a rampage over the next couple of days. Further, announcements from the Department of Disinvestment (DoD) to maintain a similar pace for the programme had investors chasing -- the once untouchable -- PSU stocks.

Shareholding pattern
Shares Outstanding 22.1
Government holding 5.8
Indian Oil Corp. (IOC) 7.4
Free float 9.0
Maximum open offer (@20%) 4.4
* shares in m 
Investor confidence towards the disinvestment programme has shown a marked improvement since the announcement. The nature (big ticket) and perceived speed of sale seems to have triggered new found faith in the process. Having said that, entry of financial bids was kept open and the last bidding day was January 31, 2002. An announcement of the winning bid was only the next logical step. Not taking everything away from the effort, the expeditious decision-making is laudable.

As per media reports, IOC has defended the rich valuations accorded to IBP on the basis of cash flows to accrue from the acquisition, the cost of those cash flows accruing to a rival in case of loosing the bid and some intangibles. However, as per reports, the company submitted a fresh bid, higher than the original, on the recommendation of the Petroleum Ministry. We had mentioned that IOC or affiliated parties could have known of the ban for future petroleum sector disinvestment, which could have raised the stakes. Nonetheless, at Rs 1,551 per share, IOC is the winning bidder.

Arbitrage Opportunity?
buy back % of free float*49.4%
Open offer price 1,551.2
CMP** 858.0
Premium to CMP80.8%
Realisation from open offer 766.0
Break-even price 181.7
1HFY02 annualised earnings 42.7
P/E Ratio 4.3
* Assuming all non-strategic shareholders tender in their shares
** CMP Current market price

With acquisition of 33.6% stake in IBP, as per reports, IOC is expected to make an open offer for an additional 20% stake at the bid price. However, there is lack of clarity on the timing of this offer. Under the scenario analysed, in the event of purchasing the shares to benefit from the buyback, the price of IBP has to fall to Rs 182, post buyback, for an investor to break-even in the deal. Assuming an open offer is made at the bid price and current market price offers no arbitrage opportunity, at Rs 182, the market, implicitly, seems to be valuing IBP at levels accorded to PSU stocks prior to the disinvestment re-rating. At post buyback price, the scrip is trading on a multiple of 4.3x 1HFY02 annualised earnings. Does this undermine the market's confidence in the programme? Or is the lack of clarity on timing and pricing of the buyback creating the pricing anomaly? Based on the post buyback price, on a comparative valuation basis, IBP, which has been the black sheep of the petroleum sector seems to be receiving similar valuations. IBP pumps are largely located in the North and North-East. However, the pumps are not perceived to be as well maintained compared to its peers, which could be resulting in lower asset prices.

IBP: Being cold shouldered
CMP* Rs 226 288 182
Net sales** Rs bn 400.2 378.1 84.4
EPS** Rs 17.8 27.0 42.7
Book value Rs 191.1 136.0 166.7
Market Cap Rs bn 76.8 86.4 4.0
P/E ratio x 12.7 10.7 4.3
CMP/Book value x 1.2 2.1 1.1
Market Cap/Sales x 0.19 0.23 0.05
EV/EBITDA x 7.6 7.3 3.7
*Current market price ** 1HFY02 annualised numbers
Enterprise value (EV) Rs bn 110.4 121.2 7.0
EV/tonne* Rs 6,000 6,000 -
EV of refining assetsRs bn 78.0 48.0 -
EV of mktg assetsRs bn 32.4 73.2 7.0
No. of retail outlets Nos. 4,600 4,562 1,539
EV/outletRs m 7.0 16.0 4.6
* Assumption

That said, with the acquisition, operating conditions are likely to change. IBP, prior to the disinvestment has been cleaning up its act. Sales have almost doubled and per share earnings have grown by 24% YoY since FY99. In the same period, the scrip has traded in an estimated P/E band of 7x-9x. The valuations are higher compared to industry peers, which could be due to disinvestment expectations. Also to keep in mind, Royal Dutch Shell, the next highest bidder, as per reports, had valued each retail outlet of IBP at Rs 13.5 m.

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