The disinvestment debacle… - Views on News from Equitymaster

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The disinvestment debacle…

Feb 26, 2001

The Cabinet Committee on Disinvestments (CCD), last Wednesday, zeroed-in on the winning bid for acquiring 51% of the Government's stake in Balco. However, this has raised hoopla in the political circles, mainly by the opposition and an allied party.The opposition is cracking down on the sale, as they object on the transparency and valuation of the deal. Going a step further, Chief Minister of the newly formed state of Chattisgarh, Ajit Jogi, has threatened to cancel the mining lease of Balco. There are doubts, however, on the legality of such a move. Balco also has a bauxite mine in West Bengal and one would have expected the leftist parties to resort to such tactics. Guess when you are in opposition you oppose and forget any ideology.

On the valuation front, doing some simple arithmetic should help bring out the root cause for the ruckus.

Valuations...
(Rs m) 
Share Capital 2,248.0
No. of shares 224.8
PAT (FY00) 600.0
EPS 2.6
Acquisition price 5,515.0
Price per share 48.0
P/E 18.5
Industry P/E 7.1

The PAT for FY01 is expected to be Rs 230m, resulting in an EPS of Rs 1. At Rs 48, Sterlite is paying 48x FY01 earnings for Balco. Hindalco, the next highest bidder, had put in its bid at Rs 2.8 bn, half that of Sterlite Industries. If anyone is to be sore it should be Sterlite for being victim of the winner's curse.

Three valuation tools, discounted cash flow, book value and comparative valuations, have been adopted to arrive at the current price by the advisors to the Government. Nevertheless, the opposition argues that Balco is rich in reserves and should attract a higher price. But does not the book value take this aspect into consideration. Guess, the opposition and labour unions need to brush up on their finance.

Every year the Government misses its disinvestment target and this year is no different. The government at the beginning of the fiscal had set itself a target of achieving disinvestments to the tune of Rs 100 bn. However, Balco is the first disinvestment in the current year (last fiscal the Government had divested 74% of Modern Foods in favour of HLL). Therefore, one can accuse the Government of procrastinating till the review of its books is around the corner (budget). The disinvestment drive seems to accelerate only as we near the fiscal end or more likely the budget day.

Returning to the moot point, having digressed, such opposition will only make the potential investors (domestic & foreign) wary of any future disinvestment deal. We can then continue pondering why China attracts 20 times the foreign investments India does.

News of such nature came in on Sunday. The Government is likely to announce fresh bidding for Air India and Indian Airlines, as global majors have backtracked on their India plans. This big-ticket sale is politically sensitive and the companies have strong labour unions that have held it to ransom on earlier occasions. Consequently, the Government went in for a soft option of maintaining control of the board. This, however, did not go down well with the strategic investors leading to their withdrawal.

Videsh Sanchar Nigam Ltd. (VSNL) is the next big ticket disinvestment. Seeing the fate of Balco one can only comment that the Government will have tougher times ahead.

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