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Preparing For An FPO?

MMTC's decision to split its stock & issue bonus shares has created expectations that an FPO could be in the offing

Minerals and Metals Trading Corporation of India (MMTC), a public sector undertaking (PSU) which is the country's biggest trader of minerals, recently announced a split and bonus of its shares.

This will be not be the first PSU that will go through this drill. Something similar had occurred at the National Mineral Development Corporation (NMDC) in the earlier part of 2008. The government was the majority shareholder in NMDC, holding around 98 per cent of its shares then. NMDC's shares then traded above Rs.10,000, a price level that made the stock quite illiquid. The stock was first split in the ratio of 10:1 and then bonus shares were also issued in the ratio of 2:1.

Eventually the company brought a follow-on public offer (FPO) as well. These steps brought down the company's share price into the Rs.250 plus range - a level where even retail investors could aspire to invest in the stock.

An extra-ordinary general meeting (EGM) held by MMTC on July 20, 2010, passed a resolution announcing the split and bonus. The resolution stated that the company will issue bonus shares in the ratio of 1:1. It will further split the shares in the ratio of 10:1. Once both the split and the bonus share issue are completed, the stock's price should come down from the current level of around Rs.30,000 per share to around Rs.1,500 per share. Though even this is a high price for a single stock, it should still help improve liquidity in this stock.

If we go by the precedent set by NMDC, there may well be some substance to the widespread belief in the market that with these steps the government is preparing the ground for a follow-on public offer (FPO) of MMTC as well.

Monopoly business
A large proportion of MMTC's total revenue is derived from the export of iron ore and import of gold. Government policy gives the company a monopoly in this segment. The company benefits immensely from being the sole trader on behalf of NMDC and other public sector heavyweights.

MMTC's capital base has expanded in line with the expansion in its activities, partly through the issue of bonus shares, of which there have been seven over the years. The latest lot, which will be issued in 2010, will be the eighth such bonus issue.

In FY10, MMTC recorded sales worth Rs.45,118 crore, while its net profit stood at Rs.217 crore. The company's operating profit margin and net profit margin have remained positive between 2004 and 2009. However, OPM and NPM have been quite depressed throughout this period at less than one per cent. MMTC's return on net worth (RoNW) was negative in 2003 and 2004. Over the last five years, the company's EPS has grown at a decent but unspectacular rate of 15.18 per cent. At more than 600 times, currently the price to earnings (PE) ratio of this stock is astronomical. This will surely descend to more normal levels once the company goes through with its split and bonus issue. Given its monopoly status, the company's business is attractive. However, do not get caught up in the euphoria about the company that will surely build up over the next few months. Invest only when the stock becomes available at a reasonable valuation.