Wiser with the experience of the past two public issues of state-owned firms, the government is likely to be extra conservative in pricing the follow-on public offer (FPO) of NMDC Ltd for retail investors.
Graphic: Ahmed Raza Khan / Mint
Shares of NMDC, the country’s largest producer of iron ore, closed at Rs435.15 apiece on the Bombay Stock Exchange (BSE) on Thursday, but the market price will not be a benchmark for the FPO price. The market price is considered high by valuation parameters such as price-earnings (P-E), price-to-book and peer value comparison.
“Considering the low free-float of NMDC shares, we are treating the issue more like an IPO (initial public offering) than a conventional FPO,” disinvestment secretary Sumit Bose said at the start of the NMDC roadshow in Mumbai.
Bose termed the issue as a “re-IPO”, indicating the market price may not be a key component in the pricing to be announced on 8 March, with the issue opening on 10 March.
NMDC has a free-float of only 1.62%, or 64 million shares, as the government owns 98.38% of the company. It will divest an 8.38% stake through the issue of nearly 330 million shares.
Life Insurance Corp. of India is the second largest shareholder with a 0.76% stake. Only 0.23%, or 9.1 million shares, are held by companies and individuals.
Although retail investors who subscribe to the NMDC offering have been assured a discount of at least 5% to the issue price, there are expectations the price band will be much lower.
Given the low liquidity of the stock, the current market price of NMDC shares may not be of much relevance to the price band, Bose said.
“(The) government heard it (concerns over low free-float and overvaluation) loud and clear,” said A. Rajagopal, managing director (investment banking) at UBS Securities Pvt. Ltd. “This is not a difficult business to value. There are established benchmarks.”
According to Bloomberg data, NMDC’s earnings per share is Rs8.62. At current market price, its P-E multiple stands at over 50 times, which analysts say is “exorbitant”. From Rs140.30 on 9 March last year, NMDC shares rose to Rs571.80 on 19 January this year.
Bose said the government had decided to resort to the conventional book-building method for the NMDC FPO after having tried the so-called French auction process in the first two issues this year.
The French auction allows retail investors to buy shares at the floor price while institutions are required to bid at any price above this. In book- building, investors have to bid within a 20% price band and the final price is determined after the close of bidding.
With every public issue, the government has been tweaking the norms. For the FPO of NTPC Ltd, the country’s largest power generator, the government chose the French auction route, but failed to attract both retail and institutional investors. It modified the French auction norms for the Rural Electrification Corp. (REC) issue, but that too failed to attract retail investors.
Historically, FPOs of state-owned firms attracted decent retail participation through the conventional book-building process. In 2004, the government offered 15-25% discounts to the market price to retail investors, boosting their participation.
Investors across the globe are keen to buy into NMDC, which produces the highest quality ore at the lowest cost, said Minakshi Ghose, joint secretary, disinvestment.
“We are conscious of the fact that retail investors need to be attracted,” Ghose said. “We have increased the number of bidding centres and are holding regular meetings with bankers to ensure the maximum participation.”
Finance minister Pranab Mukherjee has earmarked a divestment target of Rs25,958 crore in 2009-10. According to bsepsu.com, a website of 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 sold REC shares worth Rs900 crore.
It needs to raise another Rs12,300 crore to meet the revised divestment target for 2009-10. This can be done if NMDC is priced at around Rs372 a share, or a 14.5% discount to the current market price. Recent FPOs of NTPC and REC were at discounts of 5% and 8%, respectively.
Atul Chaturvedi, steel secretary, said the NMDC FPO should not be seen as a financial transaction alone.
“For many corporations, it’s a relationship investment,” he said. “For example, for a number of steel companies NMDC is the sole supplier of ore. If NMDC doesn’t give them ore, they will have to shut shop. These entities are keen to get some shares in NMDC to help improve their business relations.”