Shishir AsthanaMoneycontrol Research
In an attempt to meet its divestment target, the government is planning to raise Rs 12,000 crore through the Offer for Sale (OFS) route. Poor market conditions have prevented the government from divesting its stake in the open market. For the current fiscal, the government has already raised Rs 21,000 crore and the OFS envisaged would possibly take it closer to its target of Rs 36,000 crore.
The likely candidates for OFS are Nalco, NMDC, MOIL and BEL. The government had in the current fiscal reduced its stake in these companies through a buyback which helped these companies to reduce their equity capital. Though balance sheet ratios would have improved post reduction of equity, what really matters from an investor’s point of view are the prospects of the companies and the valuations at which the offers are made.
Here’s a brief look at the prospects of the four companies.
Nalco (National Aluminium Company)
An uptrend in the commodity cycle triggered by Chinese buying augurs well for Nalco. Alumina prices are likely to continue their journey northwards as aluminium smelters are commissioned in China. Macquarie has upgraded its estimate of alumina prices by 13-26 per cent for FY17-18. A deficit situation for alumina in China is likely to continue for this period. Nalco, the second-lowest cost alumina producer will gain from its high alumina inventory levels of 1.5 million tonnes. Macquarie is not too bullish on its high-cost aluminium smelter.
At the current price of around Rs 68 Nalco trades at 17.4 times its estimated FY17 earnings which does not make the commodity player a cheap buy.NMDC (National Mineral Development Corporation)
Growth of domestic steel companies have helped NMDC’s prospects. The company reported its highest-ever dispatches in November. It has also benefited from strong global iron ore prices. Despite a series of price hikes taken by the company, iron ore sold by NMDC is still at a 17-28 per cent discount, depending on the grade of ore.
A Motilal Oswal report on the company says that though demonetisation has hurt some steel players, forcing Odisha mines to cut prices, NMDC remains largely unaffected as it sells its ores to larger players like Essar and JSW Steel.
Based on volume as well as price growth, NMDC’s numbers are being revised by analysts. The stock at the current level is trading at around 12 times its FY17 earnings. Motilal Oswal has a price target of Rs 158 for the stock, giving some room for appreciation from its current levels of Rs 127.
MOIL (Manganese Ore (India) Ltd)
Manganese Ore (India) Ltd (MOIL) stock has moved by around 50 per cent in the last two months. Demonetisation crash had little impact on the stock. A rise in commodity prices globally has helped the stock post a sharp move. MOIL had increased prices of manganese ores three times in three months. Its performance in the second quarter also helped the stock move higher.
The company surprised the market with a 32 percent revenue growth in the September quarter. Though topline was a positive surprise, operating profits were below estimates. This was because the company managed to sell higher volumes of low-grade iron ore, which has lower realisations.
Analysts however, are not too bullish on sustainability of a price rise, but feel the demand supply scenario has changed which should keep prices buoyant. MOIL, being a miner, has its operating costs largely fixed, thus any price rise is directly transferred to the bottomline. Over the last three months MOIL has taken a 63-per cent price hike.
HDFC Securities has upgraded the company’s estimates and feels that the company can post an earnings per share of Rs 23 for FY17 which discounts the current price by 14.4 times. The broking firm has a price target of Rs 445, leaving ample room for appreciation from present level of Rs 355.
BEL (Bharat Electronics Ltd)
The government’s focus on indigenous development of defence goods has benefited Bharat Electronics Ltd (BEL). The stock is trading at its highest level ever at Rs 1,468.
Fundamentally, BEL has performed well with a 54 per cent growth in profit which was helped by a better product mix. Delay in delivery of night vision devices helped sales grow by 16 per cent. BEL is sitting on an order book of around Rs 35,000 crore, equivalent to almost three years of sales. The order book largely comprises of missiles, night vision equipment and electronic warfare systems.
While the visibility is clear, analysts are not too bullish about its performance over the near future. According to a Bank of America Merrill Lynch report quoting management of the company development of platforms, lack of infrastructure and customer led delays could lead to muted growth ahead. Impact of Seventh Pay Commission will also reduce the company’s profitability.
In any case, BEL at the current price trades at 23 times its FY17 earnings leaving little room for appreciation.
LIC to the rescue?
Among the four companies that are up for OFS, three are commodity plays. The government will have to time its issue in order to capitalise on the uptrend when appetite for the paper is high. For a retail investor participating in the OFS it makes sense only if there is a steep discount to the market price.
Market conditions in January and February 2017 will decide if the government is able to go ahead with the OFS.
But if past track record of public sector OFS is anything to go by, LIC will end up rescuing the government in these OFS’s too.
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