Divestment of shareholding in PSU – some suggestions make divestment at proper time and after proper home work to realise real valuation

[CA DEV KUMAR KOTHARI]

Summary:

Share price depend on past track and future prospects. A good track record during  last 3 -5 years and better future prospects of company can add many fold to the valuation of company. Before making an exercise of disinvestment in PSU, steps should be taken to strengthen management and financials of company. A good track record for profitability, dividend payment , bonus shares  etc. must be in place.  Before divestment , by infusion of capital at premium, book value, earning per share, dividend per share, dividend paying capacity  etc. can be improved.

Intangible e assets, hidden reserves due to value appreciation, etc. can be brought on record and valuation. Disputes and contingencies can be minimised for better investors’ confidence. These will improve valuation.

In case of well managed companies with strong track record the value can be 15-20 times of book value. Therefore, investments made prior to divestment can add manifold value to the stake holder’s stake and that will result in higher valuation of shares to be offered in course of divestment. A company which can use funds in more productive and efficient manner can be taxed at lower rate of taxation so that valuation of company improves and that adds to the wealth of government by improving value of its stake in company.

Proper timing of divestment is also important, when a company and related industry is in phase of good profitability , it is advisable to make divestment.

Divestment of PSU:

The government is in process of making divestment of certain percentage of shares in Central Public Sector Enterprises. As per information gathered from http://divest.nic.in/

 as on 31 December 2014,  50 Central Public Sector Enterprises (CPSEs) listed on the stock exchanges contributed about 14% of the total market capitalization.

Recently divestment was made in SAIL.

There are many other listed CPSU in line of divestment. In fact GOI is planning to raise substantial funds through such divestments.

Some suggestions for better pricing of shares of PSU:

Here are some suggestions for better pricing of shares:

Face value must be reduced to Re. one per share. At present most of shares are having face value and paid up value of ₹ 10/- per shares. In case of CPSE even after divestment substantial part of shares remain with promoters and institutions.

For more participation of public by way of increasing number of shareholders, it is desirable that shares should be split  by reducing face value per share to Rupee one per shares so that number of shares are increased ten times and small investors will be able to participate in share holding easily.

It is experienced that on splitting of share value, valuation improves, this is for the following reasons: a. more small investors can invest in shares.

b. many small investors hold shares for long duration, so there is demand for shares and supply is reduced.

c. more number of shareholders means more people are watching company, and the company can get benefit of their feedback and suggestions etc.

d. more people as shareholders, also makes management more accountable because there is possibility of asking questions from more people.

Proper valuations of assets:

The CPSU have large hidden reserves by way of appreciation in value of their assets,  long standing in business, goodwill, intangible assets in form of  technical and commercial information, data base, absorbed technologies, human resources, brands, trade names, suppliers chain, dealers chain, customer base, …. Etc. These intangible assets add significantly to the valuation of enterprise.

All these assets must be disclosed in books of account or other documents  In proper manner and must be considered as value booster- for value unlocking.

Restructuring and strengthening of  companies:

Some of CPSU can be restructured for better business synergies. There can be some cases of mergers and amalgamations, demergers etc.

In some cases loans and capital can be restructured before divestment . Prior issue of shares to government at fair price including premium can improve book value (BV) , earning per share (EPS) and dividend per share and long-term capacity to pay dividend.

For example , suppose a company is having 100 crores capital.  if further shares of  100 crore are issued at premium of 900 crore, the book value, EPS DPS can improve substantially. Interest burden will be reduced, so profitability of company will improve.

 This is because in case of companies having lower floating stock, price to book value ratio (P/B ratio) , price earning ration (P/E ratio) is much better. Prior infusion of capital at reserves by government, makes all these ratios  better.

For these reasons by investing say Rs. One hundred crore the fair value of shares to be divested can be improved by 500 – 1000  crore depending on facts of each case.

Improve track record:

Before disinvestment, there must be substantial improvement in track record of companies. In case of PSU it is very easy to improve results because there are large scale idleness of resources, unproductive assets, inefficiencies causing adversely, profitability and dividend paying capacity. If there is zeal, it is much easier to improve efficiency on all counts because greater the degree of inefficiency and lower productivity, there is more chance of quick improvement.

A track record of dividend during last three years, at least a bonus issue during last five years, more liquidity in shares at stock exchanges can improve value of shares significantly.

Clean accounts:

Attempt should be made to present clean accounts free from contingencies and disputed dues. In some cases there may still be large scale litigation with government and other government companies, direct and indirect tax departments etc. These must be resolved beforehand as far as possible.

Lower taxation on income:

Government companies are mostly controlled by government. Profit retained by  a government company can add more to the valuation of enterprise. Amount paid by way of tax by government companies really does not add to valuation. A dividend of Rs. One hundred  crore paid by a company to government will go to pay salaries of government employees or other subsidies. If this money is allowed to be  retained by a productively efficient company, it may add many forl  to the worth of  company, and its stake holders

Proper timing of divestment:

The divestment of shares must be at proper time. For considering proper time the following aspects can be relevant:

1. Health of company – various factors affecting health of company must be favourable as far as possible
2. Market price of shares which are already listed must be on higher side and there must be demand of such shares.
3. The concerned industry must also be in good health. For this purpose government can also make better policies about management, and taxation etc.

For example we find that at present as and when there is news about divestment in shares of any company, the share price comes down about 4-5%. This is for the reason that time is not proper and the suitable circumstances are not found to find interest of investors .

Example of recent disinvestment in SAIL

On  December 4 2014  the SAIL divestment issue opened; floor price was  set at ₹83/- per share  

One could  bid for a share  at ₹83 or above under the government’s disinvestment program.

The floor price announced by the government after market closing hours is 2.75 per cent lower than Thursday’s closing price of ₹85.35.

On 14.01.14  at about 8 AM we find following information about price of shares of SAIL:

Source: http://www.bseindia.com/stock-share-price/steel-authority-of-india-ltd/sail/500113/:

52 Week High (adjusted)	112.90(09/06/2014)
52 Week Low (adjusted)	54.05(26/02/2014)
52 Week High (Unadjusted)	112.90(09/06/2014)
52 Week Low (Unadjusted)	54.05(26/02/2014)
Month H/L	84.25/75.15
Week H/L	80.65/77.10

From http://getquote.icicidirect.com/trading_stock_quote.aspx?Symbol=SCOIND

	NSE	BSE		NSE	BSE
LAST TRADE PRICE	78.25	78.00	DATE	13-Jan-2015	13-Jan-2015
* DAY CLOSE	78.25	78.00	LAST TRADED TIME	15:48:42	15:30:47.652
DAY OPEN	79.70	80.20	BEST BID PRICE	NA	NA
DAY HIGH	80.00	80.20	BEST OFFER PRICE	NA	NA
DAY LOW	77.70	77.55	BEST BID QTY	NA	NA
PREVIOUS DAY CLOSE	80.00	80.15	BEST OFFER QTY	NA	NA
CHANGE	-1.75	-2.15	52 WEEK HIGH	112.95	112.90
% CHANGE	-2.19	-2.68	52 WEEK LOW	54.05	54.05
HIGH PRICE RANGE	86.05	85.80	LIFE TIME HIGH	293.00	292.50
LOW PRICE RANGE	70.45	70.20	LIFE TIME LOW	3.95	3.95
DAY VOLUME	3,817,822	354,176

Simple average price for 52 weeks ( highest = lowest price / 2  =  83.50

Simple life time average price  =   148 

Floor price fixed for divestment was ₹ 83/-

 Author feels that the timing of divestment of SAIL was not proper. Why divestment could not be made when steel industry was in higher profitability, and its shares were in greater demand. Even if we consider the price of shares for 12 months we find that the disinvestment was made when price of shares was low and floor price was about 73% of 52 weeks higher price. In fact the price was just equal to simple average of 52 weeks higher and lower price.  We also find that  life time  high price of SAIl per share was 293/- and lowest was  4/-  Average is 148 /-  

If the shares were sold when steel industry was in super profitability shares could conservatively be offered at price of about ₹ 200/-

Conclusions:

Before making an exercise of disinvestment in PSU, steps should be taken to strengthen management and financials of company. A good track record for profitability, dividend payment , bonus shares  etc. must be in place. By infusion of capital at premium, book value, earning per share, dividend per share etc. can be improved. In case of well managed companies with strong track record the value can be 15-20 times of book value. Therefore, investments made prior to divestment can add manifold value to the stake holder’s stake and that will result in higher valuation of shares to be offered in course of divestment.