DISEQUILIBRIUM: Value Accretive Divestment

For a government that appeared to be loath to doing anything on privatisation, it is gratifying to note that it has taken a call on it with the announcement that it will hawk 73.47 stake in Dredging Corporation of India. For a long time, the Modi government has shown strange obtuseness about strategic disinvestment. In fact, it seems to have called off the sale of the embattled and rogue IDBI Bank, which it announced in its very first full budget of February 2015. Since then the bank has virtually gone belly up with 24 out of every Rs 100 on its books validated as bad debt and stressed assets. Its provisioning for gross NPAs is the highest among PSBs currently. Dredging Corp has been going gangbusters on the stock markets ever since D Street got wind off the fact that it was going to be privatised. On Thursday it closed at Rs 732, up Rs 65 after hitting the 20 per cent upper circuit filter on Wednesday, the day of the announcement.

It already has a market capitalisation of Rs 2,057 crore and is expected to rise further in the next few days. For the June quarter, Dredging Corp had a top line of Rs 157 crore, a net profit of Rs 3.97 crore. So, this is not a battle weary loss making government establishment, but a profit making PSU which is being sold, something that was anathema to the Modi government. One only wishes that a step like this had been taken earlier and India would have returned to what is a politically unpalatable path to perdition. What is even more welcoming is that STC, MMTC, RCF and Hindustan Copper may be next on the block. I have always been a great votary of strategic sale for the value that it creates, not just for the government, but also the new owner, shareholders and varied stakeholders who are part of a larger eco-system that is built around these legacy companies, is unquantifiable.

Vajpayee’s privatisation plan has many successes. None more than Maruti Udyog, original construct of which was to manufacture a people’s car in socialist India. I remember distinctly the trepidation with which the sale process was conducted where haggling over the quantum of control premium retained the odour of fish market bargaining. But the Indian side stuck to its guns and when the deadlock had everyone on the edge, the ice breaker was a visit over the weekend to the Taj Mahal in Agra for the Japanese Suzuki team so that they could cool off. After capturing the amazing view of the Taj, the Suzuki team returned and the resultant confabulations saw a decision. The disinvestment team had broken fresh ground and managed to get a control premium of Rs 1,000 crore for the golden shares as it were. Suzuki became the owner. That is the behind the scenes element, now I come to the value accretion. It is a lesson in transformation and how the government should exit business.

The company’s initial public offer (IPO), aimed at reducing government equity by 25 per cent in June 2003 had a floor price of the shares with a face value of Rs 5 fixed at Rs 115, but over 85 per  cent bids came at Rs 120 per share or higher. Many investment bankers said the issue won’t fly. Government too was apprehensive about its success. The IPO made an offer of 7.2 crore shares but bids for Rs 7.89 crore had been received on the first day itself. The Japanese partner, Suzuki Motor Corporation (SMC), which always had a fruitful tie up with the Indian government to make MUL the market leader in this country (barring a brief acrimonious spell), had agreed to underwrite the IPO at Rs 2,300 per share of face value of Rs 100. Instead, the company opted to split each share into 20 of Rs 5 each, bringing the floor price to Rs 115 per share. In the run up to the high profile IPO, MUL held a series of well publicised roadshows in Mumbai, Delhi, London, New York, Boston, Los Angeles and San Francisco.  Maruti Suzuki shares debuted at Rs 164, giving returns in excess of 30 per cent to shareholders in a short span of time. And since then, it remains one of the outstanding success stories of privatisation.

Nearly 12 years later, Maruti Suzuki shares were trading around Rs  3,500, nearly 28 times higher than the IPO price. The stock had easily outperformed the broader Sensex, which moved up from 3,600 levels in July 2003 to around 28,000 in April 2015, a rise of nearly eight times. Come to think of it, if a Maruti customer had invested Rs 2 lakh (the price of the popular Maruti 800 then, which has since gone out of production) in the company’s IPO in 2003, he would be sitting pretty with Rs 56 lakh in April 2015, enough to buy a luxury car Audi, BMW or Mercedes. In November 2017, the stock is on fire, on Thursday, it closed at Rs 8,225 on the NSE with a market capitalisation of a blow out Rs 246,167 crore. The Sensex has gone up to 33,573, but the enormity of Maruti’s move is staggering, for it has doubled and more in two and a half years. And the person who invested Rs 2 lakh in the IPO in 2003 would be nothing short of a king’s ransom. Maruti Suzuki remains a market leader, riding the troughs and peaks of India’s burgeoning Motown story with a market share in excess of 50 per cent despite the presence of all the global heavy hitters here.

There are many such examples of how strategic sale has created enormous value for the private buyer and the government. Hindustan Zinc is symbolic of this. In April 2002, Sterlite Opportunities and Ventures Limited (SOVL) made an open offer for acquisition of shares of the company; consequent to the disinvestment of government of India’s (GOI) stake of 26 per cent including management control to SOVL and acquired additional 20 per cent of shares from public, pursuant to the Sebi regulations 1997. In August 2003, SOVL acquired additional shares to the extent of 18.92 per cent of the paid up capital from GOI in exercise of call option clause in the share holder’s agreement between GOI and SOVL. With the above additional acquisition, SOVL’s stake in the company went up to 64.92 per cent. Thus GOI’s stake in the company now stands at 29.59 per cent. SOVL was merged with Sterlite Industries India in April 2011. Sterlite Industries merged with Sesa Goa to form Sesa Sterlite Limited in August 2013. Sesa Sterlite was renamed Vedanta Limited in April 2015. Hindustan Zinc is now a direct subsidiary of Vedanta Limited, owned by mining mogul Anil Agarwal.

On Thursday, Hind Zinc closed at Rs 321.75 with a market cap of Rs 136,055 crore and the government’s stake is valued at a third of this. And September 2017 quarter top line is Rs 5,309 crore, while the net profit was a humongous Rs 2,545 crore and its last dividend was 1470 per cent. Who is benefiting? All the stakeholders.

This is the only way to clear the cobwebs in the gigantic PSU apparatus. Sell loss making entities, sell profit making ones too which are not of strategic importance to the country and make people’s lives better. Now that the Modi government has finally taken the bait on privatisation, it should aggressively conduct strategic sales and, of course, take the consolidation process in oil and gas sector, banking and engineering consulting to its logical culmination and next level of competence. It will only be accretive.


Sandeep Bamzai