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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
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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
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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
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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
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Discounted Cash Flow (DCF) 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
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Discounted Cash Flow (DCF) Method
Profit and loss account of Company X
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COMPUTATION OF FREE CASH FLOW
FCF computation for Company X
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Discounted Cash Flow (DCF) Method
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)
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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:
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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
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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)
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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
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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
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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.
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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
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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
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RESULT ANALYSIS CONTD..
Leverage (Debt/ Asset) before and after disinvestment:
PredisinvestmentPeriod (1986-1991)
0.501 0.430 0.417 0.455 0.462
PostdisinvestmentPeriod (1992-2000)
0.590 0.548 0.463 0.400 0.306 0.130 0.052 0.063 0.211
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RESULT ANALYSIS CONTD..
Dividend Payout Ratio (Div/ PAT) before and after disinvestment:
PredisinvestmentPeriod (1986-1991)
0.298 0.321 0.309 0.378 0.364
PostdisinvestmentPeriod (1992-2000)
0.276 0.268 0.260 0.140 0.116 0.085 0.112 0.122 0.235
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RESULT ANALYSIS CONTD..
Liquidity (Current Asset to Current liability Ratio) before and after disinvestment
PredisinvestmentPeriod (1986-1991)
1.132 1.170 1.316 1.225 1.387
PostdisinvestmentPeriod (1992-2000)
1.474 1.446 1.318 1.355 1.429 1.474 1.474 1.531 1.820
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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
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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
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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
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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
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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