Feb 26, 2001|
Balco: Getting to the right price
The government's decision to divest a 51% stake in Bharat Aluminium Company (BALCO) was probably the boldest move by the government as far as reforms are concerned. The opposition’s reaction to the sale too is not surprising. But, what do the numbers say regarding the valuations?
Surely, the government has got a good deal if the judgment is based on a simple price to earnings approach. BALCO, a mini navratna, has been witnessing deterioration in profitability and as a consequence its earnings per share in the most recent completed financial year has been depressed. Indeed, if indications are anything to go by, profits will decline further this year. Therefore, the apparently high P/e multiple of 19x that Sterlite has agreed to pay for the company.
However, dig a little deeper and it becomes apparent that the valuations are not all that favourable from the point of view of the government. If one were to compare the enterprise value per share, BALCO seems to have been valued at a 60% and 53% discount to Hindalco and Nalco respectively!
We have attempted to draw up another valuation model for Balco, which basically tries to plug in the disproportionately large gap in enterprise value per tonne (EV/tonne) between Balco and two other aluminium producers. We reduce the discount in the EV per tonne to a more rational 30% and 20% as compared to Hindalco and Nalco respectively.
* On the basis for the bid price for BALCO
## Alternative valuation
|Sales per tonne
|Op profit / tonne
|Profit per tonne
|Operating profit/net profit
|Investment reqd in balco
Balco needs to become more efficient in order to improve margins. For this it will need to invest in technology and support infrastructure to maximize profitability. Sterlite should have committed funds for this exercise at the time of acquisition. (It is important to highlight here that the Rs 5.5 bn being paid by the Sterlite group goes to the government and not to Balco.) We assume that Sterlite should commit a loan of Rs 10 bn to Balco. This would help in a dramatic recovery in profitability, as is evident from the numbers against Balco##.
Adjusting for the infusion of debt and the higher EV/tonne assumed by us in our calculation (cash remains constant), we come to a market capitalisation of Rs 8 bn for the company. Therefore, from this perspective, the 51% stake in the company should have cost Rs 4 bn and as against Rs 5.5 bn presently. But then one needs to also factor in the Rs 10 bn infused in Balco by Sterlite.
Finally, what we are suggesting is that the Sterlite group should have paid Rs 33 per share of Balco and agreed to infuse another Rs 10 bn as debt into the company. The efficiency gains (which we have factored in) would have ensured that the P/e multiple Balco is presently valued at would fall in line with its peers. The government would have got a lesser amount, but the company would have gained much more than a new management.
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