The disinvestment debacle… - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

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.

(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.

Equitymaster requests your view! Post a comment on "The disinvestment debacle…". Click here!


More Views on News

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

More Views on News

Most Popular

10 Indian Companies with the Fastest Growth in Dividend Payouts... (Views On News)

Jan 10, 2022

These companies have been consistently paying higher dividends for several years.

Tata Steel vs SAIL: Which Stock is Better? (Views On News)

Jan 13, 2022

With government initiatives set to boost the steel sector, find out who has a better chance of coming out on top.

Watch Out for these 4 Indian Companies Betting Big on EV Supply Chain (Views On News)

Jan 11, 2022

The upside in supply chain players could be huge but a delay in the transition to EVs, or any policy related hiccups could end the momentum.

Tech Mahindra's CTC Acquisition: Too Expensive? (Views On News)

Jan 18, 2022

Tech Mahindra's acquisition of European IT-company fails to excite investors.

These 5 Penny Stocks are Held by Rakesh Jhunjhunwala. Worth a Look? (Views On News)

Jan 18, 2022

Rakesh Jhunjhunwala is holding these penny stocks in his portfolio for several years now.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms