Disinvestment - A Financial Strategy

DISINVESTMENT – A FINANCIAL STRATEGY

MET Institute Of Management

ROAD MAP

INTRODUCTION OF DISINVESTMENT

OBJECTIVES & ITS IMPORTANCE

DISCOUNTED CASH FLOW METHOD OF DISINVESTMENT

A CASE STUDY OF BHARAT HEAVY ELECTRICAL LTD.

CONCLUSION

Disinvestment

Disinvestment :- public undertaking reduces its portion in equity

disposing its shareholding

“Disinvestment” as per SEBI guideline,

the sale by the central government/state government, of its shares or voting rights and/or control, in PSUs

1MET Institute Of Management

Objectives of Disinvestment

Reduces the financial burden on the Government

To introduce, competition and market discipline

To help public enterprise upgrade their technology to become competitive

Problems of labour, personnel and management

Lack of autonomy


Importance of Disinvestment

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt

For social programs like health and education


VALUATION METHODS

To value a company the following 4 methodologies are used:

Discounted Cash Flow (DCF) Method

Balance Sheet Method

Transaction Multiple Method

Asset Valuation Method



Discounted Cash Flow works out the value of a company based on projections of how much money its going to make in the future

Discounted: Cash in the future is worth less than cash today



Profit and loss account of Company X


COMPUTATION OF FREE CASH FLOW

FCF computation for Company X



Weighted Average Cost of Capital (‘WACC’):

What is capital? It is the money to run or start a business

Where does capital come from? Borrowing from the bank (Debt)

Owners/ Investors put in their own money in the company (Equity)


DCF Method CONTD..

What is the cost of Debt?

Bank interest rate % charged to your company

Say,

What is the cost of Equity?

Expected % return of owners/ investors

Say,

The Capital consist of:


Debt 60% Equity 40%(from Bank) (from Owner)Cost 10% Cost 15%Tax Rate 30%

10%

15%

DCF Method CONTD..

Weighted Average Cost of Capital (‘WACC’):

Discount rate can be derived from the WAAC:

Discount factor for Year 1 = 1/ (1 + 0.102) = 0.91

Discount factor for Year 2 = 1/ (1+ 0.102) 2 = 0.82

& calculated for the next 3years10MET Institute Of Management

DCF Method CONTD..

Primary Value at Discount Rate:

Primary Value of the Company for 5 years is 439


DCF Method CONTD..

Terminal Value :

It is used to make assumptions of Long Term Cash flow Growth

Terminal Cash Flow for Last year X ( 1+ Long Term Cash Flow Growth Rate)

(WACC %) - (Long Term Cash Flow Growth Rate)


TERMINAL VALUE CONTD..

If the growth rate of the economy is assumed to be 2% then the Growth rate of the cash Flow of the company is doubled to 4%

= 138 * (1+0.04) = 2315 = Terminal Value

0.102 – 0.04

Enterprise Value = 439 + 2315 = 2754

Equity Value of Company X = 2754 – 600= 2154


Does Disinvestment Improve Financial Performance?

A Case of Bharat Heavy Electricals Ltd. (BHEL)

Background of BHEL

BHEL was set up in November 1964, with three plants at Haridwar, Hyderabad, and Trichy

It is one of the Navaratna PSEs

It is generally believed that in the state owned enterprises neither incentives nor sanctions are closely related to performance

B.H.E.L is a market leader in power and industrial products that it manufactures


Background of BHEL CONTD..

Major competitors are MNCs like Siemens and ABB

It has a sound institutional system of analyzing environment

BHEL has a good system of undertaking modernization of its major products and thus reducing costs

Prices of BHEL’s products are not fixed like that of consumer goods.


Abstract…

Bharat Heavy Electricals Limited – The Study, Disinvestment of the government shareholding has been taken as an event and pre – disinvestment mean value of various financial parameters for financial years (1986-91) is compared with post disinvestment mean value of financial years (1992-2000)

Our result shows that disinvestment improves the profitability and liquidity position of BHEL while it has affected the dividend payout negatively


RESULT ANALYSIS..

Profitability (PBDIT/Sales) before and after disinvestment:

PredisinvestmentPeriod (1986-1991)

0.1552 0.1323 0.1216 0.1566 0.1548

PostdisinvestmentPeriod (1992-2000)

0.180 0.170 0.161 0.187 0.220 0.186 0.163 0.157 0.078


RESULT ANALYSIS CONTD..

Leverage (Debt/ Asset) before and after disinvestment:


0.501 0.430 0.417 0.455 0.462


0.590 0.548 0.463 0.400 0.306 0.130 0.052 0.063 0.211



Dividend Payout Ratio (Div/ PAT) before and after disinvestment:


0.298 0.321 0.309 0.378 0.364


0.276 0.268 0.260 0.140 0.116 0.085 0.112 0.122 0.235



Liquidity (Current Asset to Current liability Ratio) before and after disinvestment


1.132 1.170 1.316 1.225 1.387


1.474 1.446 1.318 1.355 1.429 1.474 1.474 1.531 1.820


RESULT

PerformanceVariable

PredisinvestmentMean Valueof FY (1986 -91)

PostDisinvestmentMean Value ofFY (1992-2000)

Difference(Post –Pre)

Accepted/ Rejected

ProfitabilityReturn on sales(ROS)

0.1449 0.1640 +0.0191 ACCEPTED

LEVERAGE 0.453 0.307 (0.146) ACCEPTED

DIVIDEND PAYOUT RATIO

0.334 0.180 (0.154) REJECTED

LIQUIDITY 1.246 1.480 +0.234 ACCEPTED


ANALYSIS CONTD..

In BHEL government equity has been disinvested up to 32.28 per cent till 31 March 2001

The share holding pattern of BHEL as on 31 December 2007 is: Union Government (67.72 per cent)

Foreign Institutional Investors (19.54 per cent), Banks, financial institutions and insurance companies (7.74 per cent) and others including general public (5.00 per cent)

For the public sector companies like BHEL which is operating in globally competitive environment, disinvestment is a good solution as it has resulted into improved profitability and operational efficiency


Conclusion

Each year, Govt announces a plan to sell its stake in listed enterprises

Used in funding various form of expansions

The Govt has substantial holding in most of the public sector companiesFor E.g.: It holds a 61.58 percent stake in SBI

If it has to sells a 1 percent stake, It can raise as much as Rs 1,200 Cr from the market

Significantly helping them to reduce their expenses


Current Scenario

Target for fiscal year 2013-14, is Rs.54,000 Cr. Rs.40,000 Cr for its stake sale in public sector units

Rs.14,000 Cr from selling its Govt shares in private companies

By Sep-14, Rs.1,325 Cr divesting stake in entities Neyveli Lignite Corporation (NLC),

State Trading Corporation (STC),

MMTC, and ITDC, all public sector undertakings


PRESENTED BY :

MS. GILLIAN DOURADO 68

MR. NAVIN DUBEY 69

MR. BURHANUDDIN KACHWALA 76

MR. RAMLAVAT PATEL 98

MS. AAYUSHI TREHAN 115

MR. SAVIO MENEZES 117

Disinvestment - A Financial Strategy

Economy & Finance

Transcript of Disinvestment - A Financial Strategy