Hind Copper divestment: Discount price saves the day

Moneycontrol Bureau

Share sale of state-run Hindustan Copper, government's first divestment in this fiscal, began on a tepid note and huge noise. The 3.89 crore issue received bids for 5.15 crore shares in offer for sale. Industry sources say, LIC, Bank of India and State Bank of India were the top investors in the Hind Copper divestment. In early trade, it had received a total bids for 79,990 shares, which are worth Rs 1.25 crore.

Eyebrows were raised when the floor price was fixed at Rs 155 per share, at a steep discount to the stock's secondary market price. Experts were looking for a logic behind the government's decision to offer a small portion for disinvestment at a heavily discounted price when, for close to three quarters of this fiscal, it held on to all divestment candidates citing poor market conditions.  

The government has plans to sell up to 9.59 percent or 8.87 crore shares of its 99.59 percent stake in Hindustan Copper through the offer for sale route. Out of this, the government is offering 3.7 crore shares or 4 percent of the company's total paid up capital.

The price discovery debate

The floor price of Rs 155 a share has generated sufficient noise in the market. Expressing his dismay, Prithvi Haldea of Prime Database told CNBC-TV18 that to fix such a price for a highly illiquid stock is baffling. "There are hardly any shares (of the company) in the market yet the base price or the floor price has been kept almost 40-45 percent lower than the market price." All this while there has been a raging debate that companies cannot underprice an IPO (initial public offer), Haldea argues. When a government company decides to go public, the task is even more difficult. However, in case of a listed entity there is a benchmark. But if the book building today is much higher than the floor price, the government will be accused of selling the stock cheap, says Haldea.

Haldea's view is in sharp contrast to another set of opinion that Hind Copper's shares are not being offered at a discount as the floor price is actually 30-40 percent higher than its real value.

SP Tulsian of sptulsian.com is among those who believe that the stock is trading at a premium in the secondary market and lauded the government for fixing floor price at a discount. He believes the stock is quoting such a high price largely due to a low float. A few years back when NMDC public offer was made around Rs 300 against the ruling market price of close to Rs 600, it was established that low float can result in distorted price discovery, says Tulsian.

A test case of future investments?

Haldea does not think future divestments will depend on response to Hindustan copper OFS. "It is a small issue which is unlikely to create any tremors in the market," says Haldea. Each OFS is going to be a standalone one based upon its own trading patterns, pricing fundamentals.Therefore the argument that it was offered to test investor appetite was mispalces, according to Haldea.

Haldea firmly believes the government should have brought a more sanguine candidate as its first divestment project of this fiscal.

Establishing Fair Price

Ashish Tater sums up:  The best deal favouring a company is when it gets around 9-9.5 times enterprise value to EBITDA, But right now taking a call even at Rs 155, the mark up is approximately Rs 15000 crore. Even after ramping up capacity, the company on FY14 basis will not be able to substantiate a profit of even Rs 850 crore. The market would like to see how it plans to raise debt to fund its capex.
Tater says investors would like atleast 14-15 percent price appreciation under tough circumstances. He says even if the government had fixed the price at Rs 132, it would have found very difficult to attract investors, other than LIC. If there is a mass participation at Rs 140-155 levels, it is no blind guess that the stock would tend to Rs 105-115 levels, says Tater. He thinks a large part or almost the entire part would be subscribed by LIC and the stock would trade rangebound in the Rs 170-180 price band.

"But just in case public participation happens at current levels, I think the stock would tank very badly even from Rs 155 levels. And there is another catch which have been missed is that the government has said that if it is near to that floor price they might even look at calling it off. So, I do not understand the exact pricing of Rs 155 even from the debt angle. If you are not satisfied with selling it even at Rs 155, why make it a floor price?"