RCF’s Offer For Sale: An Unproductive Option

The President of India, the promoter of Rashtriya Chemicals and Fertilizers (RCF), is offering 6,89,61,012 equity shares of face value Rs 10, representing 12.5% of the paid-up equity capital. RCF has submitted a notice of Offer for Sale (OFS) on March 6, 2013. As per the company's shareholding pattern submitted on December 31, 2013, the government holds 92.5% stake in the company.

The OFS will be exclusively through a separate window provided by the stock exchanges. The offer will commence at 9.15 AM on March 8 and will close on the same day at 3.30 PM. The promoters are coming out with this offer to meet the SEBI norms on public shareholding in listed companies, which the concerned entities should meet by June 2013.

Considering the current market price of RCF, the government would probably be able to raise around Rs 400 crore through this stake sale. This may be a small amount in the overall disinvestment plan of the government, which has set a target of raising close to Rs 30000 crore by the end of FY13. In the current fiscal, till date, it has been able to raise only Rs 21500 crore through disinvestment against last year's budgeted Rs 30000 crore. Before the end of FY13, the government has plans to sell its stake in three more companies viz. MMTC, SAIL and NALCO.

RCF is a government-owned company engaged in the manufacture and sale of chemicals. It produces fertilisers and markets them under the brand names of Suphala, Ujwala, Sujala, Biola and Microla. The company pioneered the manufacture of industrial chemicals such as methanol, sodium nitrate, sodium nitrite, ammonium bicarbonate, methylamines, dimethyl formamide (DMF) and dimethylacetamide. In fact, it is the only manufacturer of DMF in India.

On the valuations front, the offer price of Rs 45 under the OFS is quoted at 9.98x and 8.97x the FY12 EPS of Rs 4.51 and the TTM EPS of Rs 5.02 respectively. Further, the Indian fertilisers industry has been facing a series of issues such as delays in reimbursement of subsidies, impeded initiation of key policy reforms and volatility in key input prices. A considerable decline in governmental support due to continuous pressure of reducing its fiscal deficit and subsidy burden is expected to adversely impact the outlook on the sector in the coming future. Hence, we recommend our readers to stay away from this OFS and the stock.