Should you sell your residual stake?

IBP is unlikely to thrive in the emerging free-market scenario

In the last column, we had commenced a discussion on the PSU stocks that were part of the government's recently concluded residual stake sale through the public issue route.

After looking at ONGC, Gail and IPCL, let us zoom in on the three other PSUs - IBP, CMC and Dredging Corporation of India (DCI).

IBP is one of the major petroleum marketing companies with a diverse portfolio comprising transportation fuels like motor spirit, high-speed diesel, lubricants, LPG and naphtha.

IBP's biggest plus point is its operational synergy with IOC which is the major stakeholder in the company. Given the sharp rural thrust in the government's plans for linking roadways, IBP appears to be a case of being in the 'right place at the right time'. Its countrywide network is another plus as is the fact that the petroleum sector in which it is engaged is in good health.

On the flip-side the fact remains that notwithstanding its nationwide reach, IBP has been unable to garner any significant marketshare as compared to its peers.

Being a pure marketing player, it lacks the depth that its competitors enjoy and is highly dependent on IOC. With the petroleum sector having opened up, competition is bound to increase. It will leave IBP vulnerable to the winds of change.

The company's financials indicate a sharp spike in profitability during the current financial year, and the estimated annualised EPS stands close to Rs 73. While the financials pass muster, uncertainties regarding the future might cause apprehension in the minds of investors.

It appears unlikely that IBP will thrive in the emerging open-market scenario unless it is merged with IOC. Those willing to bet on such an eventuality could give the company a look while more prudent investors might prefer to wait and watch for now.

CMC is an end-to-end IT solutions provider. Though it does not figure among the big Indian IT players, it is certainly large enough to be taken seriously. CMC derives the bulk of its revenues from clients that are government entities. Given that the protective government umbrella will soon be withdrawn from over CMC, this is an area of concern.

The concern is partly offset by the positive synergies that the company's major stakeholder, the Tata group, brings to the table. However, those chasing the dream of a merger with TCS somewhere down the line must realise that it is still within the realm of speculation.

Furthermore, if back door entry into TCS were to be an investment objective, there are a couple of lesser-priced listed Tata group companies that might suffice.

Investor perception about the IT industry has undergone a sea-change. Those days when it was perceived as a high-growth industry characterised by high margins appear a distant memory in today's competitive and hostile business scenario in the segment.

The harsh fact is that the government missed a golden chance to cash in on the Y2K boom by making this offering then. The company's unimpressive margins and how well it can manage scalability given its relatively high attrition rate also remain concerns. v DCI is the largest dredging company in India and the seventh largest world-wide in terms of capacity. The company's customers include ports, shipyards and the Indian Navy. The company's financial record has been satisfactory. It recorded a topline of Rs 251.8 crore and a bottomline of Rs 77.6 crore for the six months ended September 30, 2003.

The positives of the company include a relatively different business model, which could stand it in good stead in the times to come as far as attractiveness to foreign investors is concerned.

Its dredging fleet is the largest in India and the most versatile. This versatility could give it the competitive edge required to grab some of the large sub-contracting assignments that are expected to crop up in the Asian region.

Finally, DCI is well-positioned to be the biggest beneficiary of the government's 'sagar mala' initiative to develop India's maritime sector.

Another plus point is that under the shade of the government umbrella, it enjoys an excellent working relationship with major port trusts in India.

On the flip side, there is a clear dependence on maintenance contracts from the government-run port trusts to take its business forward. Notably, the exposure to the Kolkata Port Trust - which stood at 57 per cent of income in FY03 - seems disproportionately large. The ongoing dispute between the two parties over payments could have ominous implications.

The recently announced change in government policy on dredging could also have a negative impact on DCI.

Overall, the scales show a positive tilt. DCI was undoubtedly the dark horse in the government's pack of six PSUs. Little wonder then that it was the public offer that attracted higher retail over-subscription.

Meanwhile, another mega issue has been slotted - this time from India's largest private sector bank, ICICI Bank. The issue size has been fixed at Rs 3,500 crore, which is inclusive of a green-shoe option.

Through the issue, the bank has mandated its merchant bankers to 'protect' its share price for an entire month subsequent to the closure of the issue or on exhaustion of the Rs 450 crore green-shoe option proceeds, whichever is earlier.

The 'price protection' concept is an interesting one. Given that the profits made by the merchant banker while implementing the price protection process will be earmarked for Sebi's investor protection fund, it passes muster as an investor-friendly initiative.

There are several other issues that continue to be slotted in the primary market. The million dollar question here is - does the market have the capacity to absorb another set of back-to-back issues, including the one by ICICI Bank?

I certainly think so and would go so far as to say that the depth of the Indian investors' pockets is a grossly underestimated one.

As long as the pricing is right and the issuer company has a robust business model and project, I do not foresee the devolvement route gaining popularity.

(The author heads Lotus Strategic Consultants, Mumbai, and can be contacted at ceolotus@hotmail.com.)

Disclosure: He has no outstanding interest in the companies discussed here.