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

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?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms