Govt mulls buyback route for Nalco, BHEL stake sale

The government is planning to opt for the buyback route, instead of an offer for sale (OFS), for divesting its stake in Bharat Heavy Electricals (BHEL) and National Aluminium Company (Nalco) so that it can get higher prices from the stake sale.

The government expects to garner around R9,000 crore from these buybacks whereas OFS is likely to fetch R5,600 crore at the current market valuations.

The government plans to sell 10% of its stake in BHEL, while it is expected to divest 25% of its stake in Nalco.

According to Sebi norms, a company is free to fix the maximum price for the buyback and this price is independent of stock market performance. The final buyback price is usually 20-30% higher compared the current share price. For instance, during the recent buyback of Pipavav Defence, the company offered a 27% premium to the last trading price(as on date of buyback announcement).

While in case of an OFS, the price is the 26-week average traded price quoted on stock exchanges. Based on this formula, 10% of government’s stake in BHEL would be valued approximately at R4,400 crore while the 25% government stake in Nalco would be valued at R2,300 crore.

These buyback proposals are part of the government’s push to raise more funds through disinvestment and make up for a shortfall of about R57,000 crore. The FY16 Budget outlined a disinvestment target of R69,500 crore for the current fiscal year, of which R41,000 crore would be through regular stake sales and R28,500 crore via strategic disposals.

However, the government has managed to raise only Rs 12,700 crore so far.

“Buybacks usually happen at a premium to the current market price while OFS pricing largely depends on how the stock has performed in the last three to six months. In the last one year, shares of Bhel and Nalco have fallen significantly. Hence, OFS was not a viable option for the government. Further, prospects of a buyback issue are independent of external market conditions,” said director of a leading domestic brokerage on the condition of anonymity.

The government had originally planned to sell only 10% of its stake in Nalco, but has scaled it up to 25% in order to meet its disinvestment target. The government currently owns 80.93% in the Bhubaneswar-based aluminium company. The government had sold 10% of its stake in Nalco and raised R630 crore through an offer for sale in 2013.

In terms of finances, Nalco has R5,573 crore of cash and equivalents on its balance sheet at the end of FY15, Bloomberg data showed. Shares of Nalco have lost more than 30% since June 2015 as falling commodity prices in global markets and surge in cheap imports from China affected its margins. “Nalco’s key advantage has been its long exposure in alumina and relatively lower cost position.

The stock performance of Bhel has also been dismal. Its shares have declined more than 50% in the last six months as the public sector company lost more than R35,000 crore in terms of market capitalisation.