Although the initial impression was that the divestment route adopted by the Government to sell oil PSU shares through cross holdings would hurt the units involved, the actual figures tell a different story.

There is no disputing the fact that the aggregate investments of Rs 4,200 crore made by the PSUs would result in an annual negative cash flow of at least Rs 250 crore and this will reduce the bottomline of these companies. The dividend yield for investments in IOC and ONGC is 1 per cent to 2 per cent, while for Gail it could be a maximum of 4 per cent. At the same time, pre-tax interest outgo for this investment would approximately be 14 per cent. However, what has come to the aid of the companies involved are the low prices at which they bought each other's stocks.

Gail shares were picked up at Rs 60, the price that was offered during the recent divestment of the equity of the firm. According to the official spokesperson of ONGC, IOC has purchased its shares at Rs 135 and not Rs160. At the same time the Gail board has taken a decision to pick up ONGC stake at Rs 135 per share. Reports indicate that the price for IOC share is at Rs 315. The company officials were not available for comment on the actual price, but based on the mechanism set for determining the price for sell of as the average of 15 days price prior to the Board meeting, one gets a figure close to Rs 315 to Rs 320 per share.

These prices are very close to the book values of the company's stock. A price close to book value is used if profits are falling and replacement value is much higher than book value. But when the profits are rising and replacement value is higher than the present book value, we should have price/book value greater than one. Today the replacement cost value for IOC works out to be Rs 3,10,062 crore which means a share price of Rs 750 - more than twice the current market price. For Gail the replacement value worked out by analysts is at Rs 140 per share.

Similarly if we take the P/E method, thevaluations turns out to be very low. The P/E multiple of these stocks is 4-5. Considering that the earnings of these companies have been consistently showing a growth of 20 per cent and the fact that the worldover P/E multiples of refining, exploration companies is above 20, one can easily estimate the intrinsic value of the stock at double the present market values. Even by the DCF methods the value of Gail stock computed by most of the analysts is in the range of Rs 105 to Rs 120. Of course the DCF analysis is based on the view of future commodity prices, but taking the present prices -- which many believe are the lowest possible, one gets a price far higher than the price paid by these companies to pick up stake in each other.

Probably the reason for the market giving these stocks such a low discounting is the fact that these stocks suffer from low liquidity (a transaction of one lakh shares can easily disrupt the price) and government control. With higher divestment these valuations would start lookingattractive. If one were to assume that there is even a 10 per cent rise in capital gains for their investments, the gains in share price would completely offset the payments made for taking a stake in each other. The improvement in valuations would, nevertheless, hinge on whether they are allowed to integrate their activities, whether they are freed from excessive government interference and whether they will be allowed to offload their cross-holdings at a later date.

Scooters

News reports suggest that scooter manufacturers, with the exception of LML, have marginally reduced prices of several models. However, one need not read too much into the price cut for two reasons. The cut is very marginal around a mere Rs 200 per vehicle and this is not enough to jumpstart demand in the scooter segment. Furthermore, the cut is in line with the 1 per cent relief in excise provided by the budget for scooters over 75 cc. But perhaps a fact that could help put the entire exercise in proper perspective is thepricing "premium", that LML has always charged on the technology front, which has been Bajaj's bugbear even in the past. One might recall that the management at Bajaj had failed to perceive the effect of increased disposable incomes, an obvious corollary to which was the consumer swing toward brand consciousness and quality, which started becoming increasingly important.

Bajaj's problems were only compounded by the continual flogging of its two archaic models namely -- the Bajaj Super and Bajaj Chetak, before a dynamically altering consumer profile. This is where LML cashed-in. But while Bajaj might have been slow to respond to the ground realities in the past, it definitely seems to have got its act together. A fact reflected by the slew on new product launches that Bajaj has lined up well into the new millennium. An obvious plus for Bajaj, is also its retailing strength and the almost 100 per cent indigenisation level. Which might also be another reason why LML has not reduced prices, despite the excisebenefit. LML still imports some components for its scooters and the benefit from the excise, has been offset against higher import duties for components.

(With contributions from Manish Saxena and Percy Dubash)