A tragic story

A tragic story
The collapse of the IFCI stake sale process indeed smacks of cussed, accursed babudom claiming yet another institution.

When the stake sale process was initiated in November, there finally seem to be light for an institution that has been maltreated quite often by both avaricious businessmen and politicians —  for it was seeking a strategic investor.

A strategic investor is defined as one who generates value over the long term. But last week, when the three final bidders were given the draft shareholder agreement, they were referred to in it as “financial” investors.

Which begs the question, why should anyone park thousands of crores into a doddering institution that is the epitome of everything that’s wrong in the public sector, and yet have little to no say in its running?

If the Sterlite-Morgan Stanley consortium sought control of IFCI, it was only to be expected, for they are not in the business of charity.

It is not for nothing that the babus at IFCI ratched up gigantic bad loans — which stood at Rs 6,600 crore at last count.

And yet they aren’t ready to let go. Come to think of it, the main aim of the 26% stake sale was to achieve better financial and operational performance!

Without any control over the institution, how will the investor monetise the assets, improve efficiencies and ensure decent returns for itself and other shareholders?

The markets hated the development and the IFCI’s stock tanked 23.3% on Thursday. And with that, a lot of retail investors have been burnt, and badly so.

That’s because hardly has there been a share more talked about in 2007 than IFCI. The institution’s management, too, left no opportunity to come on television and other media to talk about the stake sale process in the past few months, as have innumerable pundits and analysts.

Combine all that and what you get is an unprecedented speculative frenzy that led to the IFCI share price rising 644% since January this year.

IFCI was in deep crisis in 2003 and posted losses due to a restructuring of liabilities and financial assistance received from the government.

But with the help of government’s funds and loans from state-owned banks, it was able to turnaround its business in FY2007 and record a net profit of Rs 898 crore.

To be fair, the institution has become a good turnaround story, having put in quite a lot of efforts to recover bad loans.

The government is also likely to infuse Rs 1,300 crore to support IFCI, which augurs well. Now that a stake sale is unlikely in the near-term future, what doth the future hold?

IFCI was quick to invite bids on Thursday to sell its stake in various entities. These include 5.44% in the National Stock Exchange, 17% in the Stock Holding Corporation of India, 8% in GIC Housing Finance and 21% in Tourism Finance.

While this may help — if the process goes through at all — there are hardly any props for the share in the near term.

The market value of quoted investments as on March 2007 stands at Rs 1,225.15 crore, which translates into Rs 19 per share, while the book value of IFCI’s unquoted investments as on March 2007 stands at Rs 2,492.81 crore or Rs 39 per share.

The institution owns about the 12 lakh square feet of real estate across the country. Of this, 35% is commercial and the rest residential. This is estimated to be worth Rs 2,000 crore.

The market estimates a fair price of Rs 65 to Rs 75, based on basic parameters. The key to further upsides will be how well the institution can recover the Rs 6,600 crore of bad loans.

Till then, those who got burnt will have to sit tight and lick their wounds.

Well-LED
The stock of Hyderabad-based MIC Electronics has risen by a sharp 55% in the last one month. This warrants a fundamentals check.

For the quarter ended September (Q1; financial year is July-June), the company’s consolidated net revenues grew 185.6% y-o-y to Rs 87 crore. The telecom division contributed the bulk of the revenues at 52%, followed by the LED division with 37% and Infostep 11%.

Within the telecom division, the company’s offerings find application across the broadband, CDMA and GSM platforms. Going forward, however, it would be consciously scaling down its telecom business.

The company had raised funds through the primary market route to focus on the LED business by setting up additional LED video modules facilities alongside product development.

This move is beneficial for the company as it is a high-margin business and its prospects should move in tandem with the media industry.

The LED division’s confirmed order book stood at Rs 200 crore at the end of September — 90% of the orders for supply of video walls and the balance for LED lighting. A large part of this order book is executable over the next one year, with exports comprising 22% of the order book, mainly to Dubai.

The company’s distribution network and decent order book should drive growth in future and with a US entry, the LED division’s performance may be significantly enhanced.

At Rs 895.35, the stock trades at a PE of 43. The run-up does not seem to emanate from any significant fundamental change, though the company does hold potential.

Investors holding the stock may play the momentum till signs of a trend reversal are visible. Fresh exposure at these levels entails a very high level of risk.

(n_raj@dnaindia.net), (p_pallavi@dnaindia.net), (devangib@rediffmail.com)