The great discount sale begins in the public sector

The monsoon discount sale started by the government is likely to continue for the next two months.

It began on a successful note on Thursday with the offer for sale of MMTC shares getting subscribed 1.55 times thanks once again to public sector financial institutions, especially the Life Insurance Corporation.

The government managed to collect Rs 568 crore by selling 9.93% stake at an indicative price of Rs 60.86 apiece. It had set the floor price at Rs 60, a steep 71.62% discount to Wednesday’s closing price of Rs 211.45 as it needs to comply with the Securities and Exchange Board of India’s (Sebi) 10% minimum public shareholding (MPS) norm within next two months.

The government could have garnered one fourth more amount three months back but then they did not agree with the valuation of Rs 75 per share the investment bankers had suggested then.

However, despite the sharp discount, the offer did not receive great response as nearly 86% of the demand came from insurance companies and public sector banks. Retail investors mostly avoided it with only 14% demand coming from them.

S P Tulsian, an independent analyst believes that mostly public sector institutions would have participated and the low pricing by government would just spare them the additional burden.

The sharp discount offered by government, however, stumped existing investors (mostly traders) who are now staring at a loss of Rs 130 per share in coming days.

Arun Kejriwal, director, Kejriwal Research and Investment Services, believes that the stock is not a good buy even at Rs 60, given the poor fundamentals and that the current market price will come down to Rs 60-65 over the next 20 sessions.

“For a trading company, the price to earnings valuation multiple should not be more than 5 times at most, but the stock at Rs 60 per share would still be trading at nearly 100 times its fiscal 2012 earnings while it reported a negative EPS of Rs 0.71 in fiscal 2013,” he said.

Experts believe the government needs to comply with the Securities and Exchange Board of India’s MPS norms in 10 more companies within the next two months and would offer discounts in most of these except for a few like Neyveli Lignite.

Kejriwal believes that almost all of these 10 PSUs don’t have any good fundamentals and so they will be offered at discount.

The pressure was evident on Thursday as the shares of STC tanked 20%, Hindustan Copper lost 5.07%, National Fertilizer 5.42% and ITDC too hit lower circuit of 2%.

However, the magnitude of discount won’t be as great as in MMTC.

Tulsian believes that MMTC was the most problematic case where pricing and valuation mismatch was the highest and there shouldn’t be much pricing differential in upcoming offers except for a few like STC, HMT and ITI as most others have already corrected sharply.