Smooth selloff

There's enough appetite for ONGC, GAIL divestments

Scarcely a week after the government proposed the sale of cross-holdings in ONGC, IOC and GAIL, the Cabinet Committee on Disinvestment has decided to go ahead with directly offloading the government's stake in ONGC and GAIL.

If the cross-holdings had been sold, the money would have gone to the companies rather than the government, but the implicit assumption was that the government would have insisted on hefty interim dividends.

These stocks went up accordingly, as all investors benefited from the proposed deal.

In contrast, while the offloading of the government's stake in ONGC and GAIL directly helps the government meet its disinvestment target, the benefit to investors is more indirect.

The market should have no difficulty absorbing the Rs 12,400 crore worth of extra shares. Oil prices continue to remain high, and Iraqi oil production is going to take some time getting back to normal.

Besides, ONGC's unique position in the Indian market leads to enormous investor appetite. Analysts point out that the free float for ONGC is very low as a consequence of which it does not figure in the MSCI Index.

If the government unloads enough to get a 15 per cent free float, that could be a trigger for the stock. In any case, liquidity in the scrip would improve.

But given the size of the issue, an overseas offering would help since it taps new sources of demand from institutional investors who cannot operate in the Indian market, and, if the recent China issues and the Vedanta issue are any indication, there's plenty of appetite for offerings from China and India.

Ditto for the GAIL issue, where a recent precedent exists in Indonesian gas company PGN's $297 million equity issue. PGN has 91 per cent of the Indonesian gas market and the issue was priced at 9.7 times earnings.

GAIL currently quotes at around 10.8 times earnings, it will benefit enormously from recent gas finds and accounts for 95 per cent of the fast-growing Indian market.

The market, in fact, is more confident on GAIL, given the much smaller size of the government offering, and the stock was up 4.8 per cent on Wednesday. In contrast, ONGC fell 0.8 per cent, but then these stocks had already run up on news of the crossholding sales.

ICI gets its house in order

About a year back ICI sold its Synetix (nickel catalyst) business for a consideration of over Rs 140 crore. Earlier this year, it disposed its 51 per cent stake in Indian Explosives Limited for Rs 66 crore. And now it has gone ahead and sold its nitro-cellulose and trading businesses for Rs 75 crore.

ICI is now left with its core paints and industrial specialities businesses and just the rubber chemicals business within the industrial chemicals division. The nitro-cellulose and trading businesses together accounted for around Rs 80 crore in FY03, according to the company's annual report.

Further, going by the segment results, these businesses didn't seem to enjoy great margins. In the six months till September 2003, the industrial chemicals had EBIT margins of less than 7 per cent, compared to over 16 per cent in the year ago period, when the Synetix business was still with the company.

The nitro-cellulose and trading businesses account for around 50 per cent of the industrial chemicals division, which means its margins also would be in single-digits. In that case, ICI seems to have got a decent deal, as it was valued at almost one times sales.

Meanwhile, the core paints and industrial specialities businesses are doing pretty well - in the first six months of the current fiscal, EBIT of the paints business has more than doubled to Rs 10.8 crore, on the back of a 17 per cent increase in sales.

As the outlook for housing construction remains upbeat, this division is expected to continue doing well in the near future. The industrial specialities business grew sales by 9 per cent and EBIT increased 10 per cent even as the company fought pressures of higher raw material costs.

Among others, this division caters to the textiles industry, which could result in high growth in the coming years.

Thanks to the spate of divestments, ICI's cash kitty has ballooned, and would now be well over Rs 300 crore (adjusted for investment in subsidiary, Quest International).

This translates to almost Rs 80 per share, adjusted for which the current share price works out less than 9 times estimated 2004 earnings.

With contributions by Mobis Philipose