Wednesday, 21 December 2011

SCI buyback of shares- bad idea?


A report in the Hindu Business Line says that the cash strapped government may be looking at the Shipping Corporation of India to buyback some of its shares to help the country's declining fiscal situation. "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", the report says. "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 (under present norms) SCI for buyback of five per cent of its shares".

Financial and industry analysts say that while this practice is normal- in bad times, the government usually eyes cash rich PSUs to garner funds and, at the same time, indicate to the bourses that the stock price of the PSU is undervalued- a buyback of shares by SCI may not be a good idea for many reasons. For a start, they point out to the fact that SCI has been making losses in the last three quarters (Rs 140 crores in the quarter ending September 30) and that no turnaround is expected in the next year, given poor conditions in freight markets. 

This, combined with SCI's expansion plans- although these have been slowed down in the present scenario, as statements by SCI and the Ministry of Shipping indicate- means that the PSU will need a substantial part of its cash for capex and other reasons to do with covering losses and presenting a stronger balance sheet to potential lenders. As the Hindu points out, an outstanding debt of Rs 3500 crores " makes it all the more important to maintain a comfortable cash reserve to enable it to negotiate best rates in the international market. In the current scenario, the company has no alternative but to draw on its cash reserves to put up the equity".

"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," it concludes.

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