In a bid to meet its disinvestment and fiscal deficit targets, the Indian government has once again started milking the public sector enterprises (PSEs) falling under its centralised ownership. Last month, after the government failed to convince the trade unions of Coal India for the latter’s disinvestment, it made the company to declare a special dividend of Rs. 29 per share, which amounted to Rs. 16,486 crore for the 90% stake the government is holding. It is just one such case.
Now, the companies, which could have got sold at a valuation in the multiples of their current valuations, are actually getting divested at some very low price per share. One of these companies is Engineers India Limited (EIL). EIL is the same company which issued its shares at Rs. 290 a share in its July 2010 FPO and the issue got a huge response to get oversubscribed 13.14 times.
Now, even after three and a half years, its shares are getting sold at almost half of its earlier offer price. The company is again coming out with its follow-on public offer (FPO) and the issue for the same will open for subscription today onwards. The issue is scheduled to get closed for the institutional investors as well as the retail investors on February 10 i.e. Monday.
Price Band & Retail/Employee Discount - EIL has fixed Rs. 145-150 as the price band for its shares in the FPO and has decided to offer Rs. 6 as a discount to the retail investors and employees of the company. So, if the price gets fixed at Rs. 150 after the issue gets closed, the retail investors will get the shares at Rs. 144 per share.
Lot Size, Minimum & Maximum Investment - With a lot size of 100 shares each and the higher offer price of Rs. 144 per share (Rs. 150 per share less Rs. 6 discount), a retail investor would be required to commit a minimum investment of Rs. 14,400. Maximum investment for a retail investor would stand at Rs. 1,87,200 for applying 1,300 shares in the offer.
Shares on Offer - The issue size is relatively smaller and the government is going to sell about 3.37 crore shares in the offer, constituting 10% of the company’s existing paid up capital. The company is not going to get any money out of this share sale as the whole of this issue would be a disinvestment by the Government of India. After the FPO, the government’s holding in EIL will come down to 70.4% from the current 80.4%.
35% Issue Reserved for Retail Investors - There are three categories of investors – Qualified Institutional Bidders (QIBs), Non-Institutional Bidders (NIBs) and the retail investors. 50% of the issue is reserved for the QIBs, 15% for the NIBs and the remaining 35% for the retail investors. 5 lakh shares have been reserved for the employees of the company.
Financials of Engineers India Limited
Net Profit of the company for the six months ended September 30, 2013 stood at Rs. 221 crore with revenues at Rs. 1,038 crore. The same figures for the twelve months ended March 31, 2013 were Rs. 576 crore and Rs. 2,773 crore respectively. At the current price of Rs 149.05, the stock trades at 8.72 times its trailing twelve months earnings per share and 2.19 times its book value.
EIL is a cash-rich company and has zero debt. It paid Rs. 6 as dividend last year. At Rs. 149.05, it offers a dividend yield of approximately 4%. Its order book stands at Rs. 3,232 crore which is closer to 1.2 times its FY 2012-13 sales.
Is it a great opportunity for the investors to buy EIL’s shares at these valuations?
I would say No, as I think it is not a “not to be missed offer” and its market price has the potential to fall below the offer price in a very short period of time. Also, I think the government in the last few years has either created a deeply messy business environment for some of these companies/sectors or has failed to clear the obstacles in their growth.
At the same time, these companies have failed to deliver on the investors’ expectations so badly that the investors, who made huge investments a few years back in these companies, are regretting their decisions and are highly reluctant to do the same once again.
Should I subscribe to EIL FPO at Rs. 145-150?
Share price of Engineers India Limited on the NSE got closed at Rs. 149.05 on Wednesday and I think it is very much possible for the stock price to go down even below the offer price of Rs. 144 i.e. Rs. 150 less retail discount of Rs. 6 per share. So, why should I buy it in the FPO at Rs. 144 when I am getting it for a price less than Rs. 144 from the market itself? Probably one should not.
But, if your investment horizon is longer than just listing gains and if you have some hope that the business environment for EIL would improve in the coming months/years, I would say one should subscribe to it.
Again, prevailing is a bad time for the share market and this FPO has also been an overhang on the company’s price movement. Going forward, it would depend on the company’s financial performance and the government’s policy framework, how EIL share price performs and whether the investors remain stuck in losses or if they get rewarded for their patience.