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MMTC Offer for sale: Our view - Views on News from Equitymaster
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MMTC Offer for sale: Our view
Jun 13, 2013

The government is all set to sell its stake in MMTC to meet its Rs 400 bn disinvestment plan for the current fiscal year. MMTC disinvestment would be the first stake sale of the government in the current fiscal.

MMTC was established in 1963 and is the largest trading company in India and one of the major trading companies in Asia. It is a Mini Navratna company focusing on trading of commodities ranging from minerals to agro commodities. It deals in Precious metals, fertilizers, Coal and Hydrocarbons, Metals, Agro products and other minerals. MMTC also has a wholly owned subsidiary named MMTC Transnational Pte Limited (MTPL), Singapore and various joint ventures including a pig iron plant in which MMTC holds 49.8% stake.

Historical financials highly volatile: The company's financial performance has been inconsistent and erratic over the past few years. During FY12, its consolidated adjusted net profit declined by 62.0% YoY to Rs. 430 m. During FY13, it reported a net loss of Rs. 710 m on a standalone basis due to 56.9% decline in top-line (The company has not reported consolidated FY2013 results). The past financials of the company do not indicate stability in earnings going forward.

Issue details

The FPO comprises an offer for sale (OFS) of 93 m equity shares of face value Rs 1 each. There is no fresh issue of equity. MMTC has fixed the issue price at Rs 60 per share. The OFS would take place through a separate window of stock exchange (Bidding) on 13th June, 2013 from 9.15 am to 3.30 pm. The price set is at a discount of 72% to the closing price on 12th June, 2013. If fully subscribed, the government would get Rs 5.6 bn through this stake sale. There is a huge difference between the floor price and the market price of MMTC as the scrip is illiquid.

The government currently holds 99.33% stake in State-run trading giant and the stake sale would help the company to meet SEBI's minimum public shareholding norm. The stake sale, which was originally slated to take place in March, was deferred on valuation concerns.

MMTC is a trading company with a 'Five Star Export House' status. However, at the current price, the stock is trading at a very expensive valuation of 398x FY12 PE due to low free float (0.67% of its market cap). Even at a floor OFS price of Rs. 60, it is trading at FY12 PE of 113x, which is very expensive in our view. Even if one takes the average EPS of the last five years (Excluding FY13), the PE on the same works out to be around 40x, which is still expensive we believe. Hence we recommend investors to Avoid the issue.

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