Mumbai: The follow-on public offer (FPO) of NMDC Ltd, may be at a substantial discount to its market price, going by the numbers announced by finance minister Pranab Mukherjee in his Budget speech on Friday.
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A rough calculation reveals that the discount could be as high as 22% to the public sector firm’s Friday closing price of Rs431.70 on the Bombay Stock Exchange (BSE). In comparison, recent FPOs of NTPC Ltd and Rural Electrification Corp. Ltd, (REC) were at discounts of 5% and 8%, respectively.
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A bigger discount may help attract retail investors who had largely stayed away from NTPC and REC FPOs on a perception that the discount offered was insufficient.
According to an investment banker who has been involved in some recent share issues by public sector units, the government may price the NMDC issue, around 8% of its total equity, at a discount of 20%-25% to its current market price.
“Due to poor liquidity of the stock, NMDC shares (are) highly overvalued at the moment. To sell shares of NMDC, a discount of at least 20% is necessary,” said the banker, who did not want to be identified.
According to revised estimates contained in the 2010-11 Budget unveiled by Mukherjee, the government planned to raise Rs25,958 crore in 2009-10 through divestments in public sector enterprises.
According to bsepsu.com, a website launched by BSE, the government has raised Rs12,739 crore in the current fiscal through share sales in OIL India Ltd, NHPC Ltd and NTPC. Last week, it also sold shares worth Rs900 crore in REC.
That means the government needs to raise some Rs12,320 crore more to meet the revised divestment target for 2009-10.
Considering that an initial share sale in Satluj Jal Vidyut Nigam Ltd accounts for Rs1,200 crore of that, the NMDC FPO will need to raise around Rs11,100 crore.
Mukherjee, in his Budget speech, said NMDC and Satluj Jal Vidyut Nigam share issues were “in progress” for this fiscal year.
In NMDC’s case, given that the government is planning to issue fresh equity of 332.2 million shares, the issue price works out to Rs334 per share. At this price, the discount would work out to 22% to Friday’s closing price on BSE.
The discount is dictated by necessity,?said?R. Balakrishnan, a Chennai-based investment adviser. “Once there is more supply in the market, these valuations cannot sustain. Unless the government arm-twists institutions such as Life Insurance Corp. of India (LIC) to buy, such prices look absolutely ridiculous,” he said.
According to the prospectus filed by NMDC for the FPO, 98.38% of the company is owned by the Union government. LIC is the second largest shareholder, with 0.76%, while other state-owned insurers and LIC MF Asset Management Co. Ltd together hold 0.62%.
Only 9.1 million shares, or 0.23%, is held by companies and retail individual shareholders.
According to data from Bloomberg, NMDC’s earnings per share was Rs8.62. At current market price, its price-earnings multiple stands at 50.12, which analysts described as exorbitant.
“I think it’s overpriced 10 times,” Balakrishnan said. “Given that the company is in the commodities sector, where prices keep fluctuating, it should be trading at 6-7 times price-earnings.”