There is a need for the government to think like a high net-worth individual. While, during younger days, many investors may tend to accumulate all types of shares in their portfolio, when they require funds, logic demands that they sell off the shares in companies that do not make any meaningful contribution to their portfolio. Irrespective of whether the company is doing well or has the potential for doing well, the contribution to the total value is so little that any change in the company’s shares is immaterial.
Irrespective of whether such shares move up or down, the portfolio remains unchanged. Likewise, the government, in its portfolio of PSUs, has quite a few of these small companies which, though profitable, have not been able to scale up sufficiently to make any difference, irrespective of the changing in the share prices.
These include companies like Balmer Lawrie (market cap: Rs2,400 crore) and Balmer Lawrie Investments (which holds major shares in Balmer Lawrie, having a market cap of over Rs1,000 crore). These companies are good dividend payers, but their value is too small.
One has to sell when the environment is good. Baltic Dry Index, one measure used to gauge the health of the shipping industry, has more than doubled from 600 a year ago to 1675. Against this background, the government has done well to identify Shipping Corporation (market cap: Rs6,000 crore) for sale. Its price to book value is now 0.78x and the government has to ensure that it gets the maximum value, if it wants to sell to a strategic partner.
The time to sell is when the prices are riding the crest of the cycle. Copper prices are making new highs every day and expected to cross an all-time high. Of course, apart from prices, one also has to look at the reserves a company has. With industrial activity picking up, though slowly, the government can also look at divesting Hindustan Copper. The company is valued at Rs13,500 crore by market cap. The government holds 76 per cent shares in the company and, if it wants to maximise its value, it could start selling piecemeal, say, 20 per cent to the public at a time, to see the interest of the public.
Business India has always argued that it makes sense for the government to go in for IPOs and FPOs, by dribbling out small shares to discover the right price in a bid to maximise returns. This is especially true for small as well as medium-term companies, which have not been listed. Steel prices are riding high and it makes sense for the government to come out with an IPO of the 38-year-young, Visakhapatnam-based Rastriya Ispat Nigam Ltd.
The company has the capacity for producing a little under 7 million tonnes of steel and is today operating at 98 per cent of its capacity of 7.3 million tpa. This translates into nearly 10 per cent of the total steel produced by India at present. The company has just declared a profit of under Rs300 crore.
Instead of a new issue, the government can go in for a divestment of its own shares through an offer for sale, going in for a capital reduction ahead of the IPO. A small loss ahead of the IPO could well give it much higher returns going ahead, after the IPO
Given that the steel prices are moving upwards, it makes sense for the government to divest a small portion to the public to find out the price the market is willing to pay. It is true that the huge capital of over Rs4,500 crore may be a deterrent. Instead of a new issue, the government can go in for a divestment of its own shares through an offer for sale, going in for a capital reduction ahead of the IPO. A small loss ahead of the IPO could well give it much higher returns going ahead, after the IPO.
Selling to the public in most cases will prevent the creation of monopolistic sectors – like it would in the case of copper. In steel, there are many players and, hence, such a situation is unlikely. Many of the existing players will be interested in taking companies, if offered the right price. The logic in case of unlisted companies is that dribbling out small portions of the holdings will allow it to test the markets, even if it means selling at a marginally lower price and allowing the balance portfolio of shares of that company to grow. The government is doing the right thing in the case of LIC, where it is selling off 5-10 per cent of the shares. Even if the proceeds come in the next fiscal year, given that it is the largest company, the market value could well surprise even the government.
The point is that, while everyone is looking at big ticket sale items from the government, the low-hanging fruits can easily be sold on the OFS platform on the exchanges. And dribbling out small portions as opposed to waiting for a strategic partner is a better option.