We were back in the hotel in Singapore after meeting several potential investors. The Secretary called me aside and said that the lead managers were insisting on pricing at the bottom of the band; they were foretelling doom even at that level. He asked for my recommendation. We must price at the top, I said. He had got used to my exuberance but this time, the government’s ‘face’ was on line in the biggest ever equity issue in India.
My confidence came from the roadshows over the past three days. We were meeting the team from one of the biggest investment funds. The allotted time was up. We were getting late for the next meeting. The team leader noticed my impatience and said: “Please don’t worry about any more meeting, we will pick up your entire issue!”
The Secretary took the call, the issue was priced at the top of the band, and bids for the first Rs 10,000 crore came in at the rate of Rs 1,000 crore per minute from India and overseas, reinforcing ONGC’s rank as the most valuable company of India.
The season is here again. Equity from selected Central Public Sector Enterprises (CPSEs) is being sold without diluting the government’s majority ownership. Public sector disinvestment is often described as selling the family silver. It’s true that the silver is tarnished but that is no reason to sell it as white metal.
Price discovery through book-building is being followed as the standard process. The price band is capped to 120 per cent of the floor price which is aligned to the current trend in the market. This is no joy. First, people proposing, influencing and making the decisions often do not have necessary and sufficient domain knowledge. Second, market capitalisation is a perception related to facts, and not an intrinsic fact. Third, the ‘public sector’ label itself dilutes enthusiasm.
However, pricing is the issue in this article.
With 7.5 per cent of the world’s known bauxite reserves, India comes fifth after Australia, Guinea, Brazil and Jamaica. BALCO’s mines produce high-grade ore with about 47 per cent yield.
When the government decided to sell off BALCO, the adviser short-listed four valuation ‘experts’ and the one with the lowest bid was naturally selected. This expert reportedly took the view that factors like potential earnings, market share, reserves and surplus etc. are irrelevant in a ‘going concern’ and set a valuation based on past cost of fixed assets. The sale price was Rs 551.5 crore when BALCO had reserves & surplus of Rs 460 crore! The resource from the captive mines went free!
But the real story is not even that. In any mineral industry, ‘upside’ is the name of the game. Sub-surface resources cannot be directly imaged and measured; therefore, the quantifications are based on assessment of probability of recovery in different scenarios of technology and economics. The winning mantra is the component of value assigned to probable and possible reserves. Against this, valuation of assets on the surface is child’s play.
The share price does not reflect the value of the ‘opportunity’ on the surface, either. There are daunting hurdles in setting up a greenfield project, and many of these have to be crossed in brownfield projects as well. Meaningful financial closure requires finality in several areas, notably land acquisition and resettlement,
environmental clearances, sourcing of water, technology, materials and equipment, back-to-back contracts on inputs and outputs, induction of skilled and experienced personnel and such intangibles.
Any of these issues may take years to finalise, any of these may get fouled up at any time and any of these issues may derail everything else. Investment in a ‘going concern’ even if loss-making, provides significant risk mitigation.
The ‘cost’ of the asset is known. A matrix of globally knowledgeable professionals and academicians should determine the ‘value’ based on a holistic assessment of the CPSE’s fundamental SWOT (strengths, weaknesses, opportunities, threats) in given boundary conditions; this should be logically comparable to pre-notified global benchmarks, not cherry-picked afterthoughts. The entire report should be accessible in the public domain to ensure transparency through informed debate.
The government should then set the ‘price’ with premium or discount over the value in fair and reasonable judgment. If the figure goes away from the current price of the share in the market, so be it. The market is guided by different sets of dynamic influences, and many of these are extraneous at any given time. If this incremental process takes another four or six months, so be it.
(The writer is chairman, Team Raha Ideation Ltd., and former chairman, ONGC)