Which route will the government take when it chooses to divest its stake in BPCL, Shipping Corporation and Concor?

If market buzz is to be believed, the Government is preparing to carry out strategic sales of equity in Container Corporation of India (Concor: about 30 per cent), BPCL (at least 51 per cent if not the entire 53.29 per cent), Shipping Corporation of India (63.75 per cent), North Eastern Electric Power Corporation (100 per cent) and THDC (75 per cent). Now the government could choose to take the public issue route, as it did with Indian Railway Catering and Tourism Corporation’s (IRCTC), to divest its stake (Concor, BPCL and SCI are already listed). However, rather than an IPO, it is widely expected to opt for a strategic stake sale, for reasons elaborated later in this piece.

While it may have under-priced the IRCTC IPO , as it seeks to unlock value in other assets, the overwhelming demand for the rail ticketing platform’s offering will likely embolden the Government to seek a higher share premium or Price Earnings (PE) multiple for strong public sector undertakings.

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For instance, if Concor commands a price-earnings multiple of 32-33 in the market today, the Government has to maximise its valuation by eyeing, say, a five-to-six-fold increase to the current level given that management control will be ceded. Only then will it it make sense for it to cede control.

The valuation story should also be different for BPCL, as the Government looks to privatise the company by selling a good part of its 53.3 percent stake to a strategic investor. The winning strategic investor will gain 34 million tonnes in refining capacity and access to a 25 per cent share in India’s fuel marketing. These are humongous numbers that cannot be ignored. Pricing will therefore be crucial given that BPCL is currently available at a paltry 18 price-earnings multiple on the stock markets. The PSU deserves a huge control premium and if it handles the sale adeptly, the Government should be able to realise it.

Extracting a premium for the controlling stake is what will distinguish the men from the boys. If the Government does choose to take the strategic sale route — as it most likely will for the proposed Concor, BPCL and Shipping Corporation divestment — it will have to ensure that it gets a premium for the “controlling stake” it may part with.

The importance of pre-bid consultations

It goes without saying that the strategic investor will also need to see the value involved and decide to invest knowing there is much more money to be made. This is now possible, as the government has reportedly allowed pre-bid consultations for strategic share sales. If it manages to extract a premium at the pre-bid stage itself, the government can pat itself on the back.

Pre-bid parleys are the right way to go, say the experts, as they will help narrow the gap between perceived value and real value. This will provide clarity on every aspect of the stake sale, they point out. Indeed, pre-bid consultations, they opine, could have paved the way the process for a strategic stake sale in Air India. In its absence, all such attempts have fallen through.

Lessons from the IRCTC IPO valuation

Capital market experts are unanimous in their view that the government could have easily set a higher price band for the IRCTC issue and these lessons cannot be ignored. It is critical that the Centre focuses on getting higher value for top-quality public sector assets that have a sound business model and strong fundamentals.

In fact, had the mandate to manage the IRCTC IPO gone to a foreign bank, the experts say, it would have unequivocally advised the Government to treat it as an e-commerce play and take the strategic sale route. Indeed, they feel that instead of 12 per cent, as much as 20 per cent could have been offered to a to potential strategic investor, for a much higher price of, say, ₹1,000 per share.

Read more: With an oversubscription of 112 times, IRCTC’s stock offer is a showstopper

The IRCTC IPO experience thus holds a big lesson for policymakers in the disinvestment department — market watchers believe that when a company is eyeing the primary market and has no peer valuation available to arrive at an issue price, a strategic sale is the way to go. Indeed, strategic sales have always proved the best way forward in such situations, as was the case with VSNL, Balco, Hindustan Zinc, Indian Petrochemicals, several ITDC hotels and Modern Food Industries.

Most were done between 1999 and 2004, by the Atal Behari Vajpayee government. The strategic sales during that period alone fetched the government ₹6,344 crore, a princely sum in those days.

Even in the case of IRCTC, the government would have realised a much higher value for the PSU had it taken the strategic sale route and held pre-bid consultations. Indeed, this could have been followed up with an IPO, as IRCTC’s true value would have been discovered and the government would have realised a much higher amount.

Positioning is also very essential in the process of value-discovery of any enterprise, says senior industry analyst Srinath S. Critics say that IRCTC was sold on the cheap as somebody in the system did not want to take the risk of the issue bombing, and that led to it being under-priced and, consequently, undervalued. Had IRCTC been positioned as India’s largest rail-ticketing tech platform, holding a near monopoly, the conversation would have been different and the valuation would have been far higher.

How IRCTC does after listing will be the litmus test that shows whether the government’s IPO managers got it right. Even if they didn’t, the lessons from the listing will serve the government well in future share sales.