The Balco privatisation

By C. R. L. Narasimhan

The Government decision to sell 51 per cent of its stake in Bharat Aluminium Company (Balco) to Sterlite Industries is significant for many reasons. Being only the second strategic sale of public sector enterprises - the first was the sale of Modern Foods to Hindustan Lever in March 2000 - it nevertheless gives the privatisation programme a much needed shot in the arm on the eve of the Budget.

The strategic sale method itself has been fashioned to take care of diminished valuations that government ownership seems to inflict on the PSEs. Under it the management control passes on to the buyer even if the Government remains a dominant shareholder after the sale. In the case of Balco, of course, Sterlite is acquiring 51 per cent leaving no ambiguity as to who would be in control. The Government that keeps 49 per cent of Balco for now may dispose it of later, hopefully for a higher price. It will be interesting to watch how the market values a former PSE that has passed into private hands and trades on the exchanges for the first time.

The sale consideration of Rs. 551 crores has to be viewed against the backdrop of the aluminium industry's performance. Calculations made on the basis of the financial performance of three top players - Hindalco, Indal and Nalco for last year - indicate a rising earnings stream: for instance, their EPS was Rs. 15.60 on March 31, 2000, considerably better than Rs. 11.40 for 1999 and double that of 1998. Other share market data also bear out the upswing in the aluminium industry. The net profit for the three companies was Rs. 1,235.30 crores on March 31, 2000 up from Rs. 900.70 crores a year earlier. The Government has also taken credit for another Rs. 244 crores representing deemed dividend. (Balco's capital, all held by the Government was halved last year).

Sterlite the acquiring company is one of India's fastest growing entities. Last year on a turnover of Rs. 2,070 crores it earned a net profit of Rs. 105 crores. Also good at stock market manoeuvres it made an abortive bid on Indal thoguh it had earlier taken over Madras Aluminium Company. After the latest acquisition the company becomes a formidable player in metals - aluminium, copper and zinc. The group is also strong in fibre optic cables. The fact that Sterlite will bring in cash of Rs. 550 crore plus at one go has not gone unnoticed.

Once Balco is privatised, details, besides the financial ones, will move to the centre stage. As for its nearly 7,000 strong workforce, the Government has said they need not fear a lay-off at least for one year. That, of course, is possible because the government-vendor of majority stake can impose such conditions. But in more common market-dictated deals, there can be no such guarantee for the employees. Even in Balco's case it remains to be seen how they fare in the long run. Many such issues involving employees, financial performance, dominance in the industry will be discussed long after the company moves into private hands.

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