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SCI may not fit the bill for Govt buyback plan - 2011-12-19

Shipping Corporation of India or SCI is reportedly among the public sector undertakings (PSUs) picked up by the Department of Disinvestment to help the Government bridge its revenue gap through a buyback of shares. One of the criteria in choosing candidates for the buyback is said to be their free cash reserves: Those with surplus cash of more than their turnover could buy back 10 per cent of their shares and others with free cash of at least 50 per cent of their turnover, could be persuaded to go for a five per cent buyback. SCI had a cash surplus of over Rs 2,000 crore at the end of last fiscal; its turnover was around Rs 4,000 crore. This qualifies SCI for buyback of five per cent of its shares. However, the company's reserves have come down to Rs 1,900 crore in the last quarter, which is marginally below 50 per cent of its turnover. In any case, the criteria has no meaning so long as the Government wants the PSUs to part with a portion of their cash surplus. Normally, companies go for share buyback to return excess capital to shareholders and send signals to market that the stock is undervalued. Here, the stand of the Department of Disinvestment is understandable; it needs to raise Rs 40,000 crore in the current fiscal to cover the Government's revenue gap. Being the owner or the majority equity holder, it is natural that the Government approaches PSUs at the time of financial difficulties. It had done so in the past too.
But the case of SCI now is different from most others in the list. The shipping major has been making losses in the last three quarters. It reported a loss of Rs 140 crore in the quarter-ended September 30. Given the freight market outlook, the trend is unlikely to reverse in the near future and freight rates are expected to remain subdued till 2012 end. SCI has a large capex plan. It has on order 26 vessels and needs to buy more to replace its old tonnage. Normally, it goes for overseas borrowings to meet its debt portion for fleet acquisitions. However, it needs to bring in its equity component of at least 20 per cent. In the current scenario, the company has no alternative but to draw on its cash reserves to put up the equity. SCI has outstanding debt of about Rs 3,500 crore. This makes it all the more important to maintain a comfortable cash reserve to enable it to negotiate best rates in the international market. SCI stock has been trading at about Rs 57 in the last few sessions. On Wednesday, it closed at Rs 56.20, marginally higher than its 52-week low of Rs 54.20. The current market price is only 40 per cent of the follow-on public offer price (Rs 140) offered a year ago. According to the latest annual report, the company's paid-up equity capital stands at Rs 465.80 crore (46.58 crore shares of face value of Rs 10 each). Even if the company offers to buy back five per cent shares at a premium of 25 per cent to the current market price, it can at best fetch Rs 170 crore, which is a pittance compared to the Centre's target of Rs 40,000 crore. But the question is why an investor who bought shares at Rs 140 or higher earlier tender them today at a lower price? In case the company goes for a selective buyback of only the stocks tendered by the Government, it would be unfair to the minority shareholders. Taking all factors in account, it would be in the best interests of SCI for the Department of Disinvestment to exclude it from the buyback proposal.

Source: Hindu Business Line