Long road ahead

IFR Asia India Report 2012
9 min read
S Anuradha

The Indian Government’s target to make divestments of Rs300bn (US$5.4bn) for this year is looking increasingly ambitious with the stalling of more state selldowns.

Farmers use camels to transport their watermelons across the river Ganges at Neevna village on the o

Source: Reuters/Jitendra Prakash

Farmers use camels to transport their watermelons across the river Ganges at Neevna village on the outskirts of the city of Allahabad

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India’s ambitious privatisation plans carry the potential to provide good investment opportunities and, in the process, energise the stock market. However, amid regular scandals and doubts over the government’s ability to arrest an economic slowdown, there are no signs this will happen any time soon.

Each year, the government announces targets to sell its stakes in public-sector entities as it looks to reduce the fiscal deficit. A number of companies are on the block as the state looks to reduce its ownership levels to 51% eventually.

For the current fiscal year, ending March 31 2013, the federal government has set a target to raise Rs300bn (US$541m), but, to date, it has raised just Rs1.24bn.

Appetite for these state-owned stocks is low even after a 12% gain so far this year in the benchmark Bombay Stock Exchange Sensitive Index, making it one of the better-performing markets in Asia in recent months.

“The positive sentiment necessary before a disinvestment is not there,” said Sandeep Shah, head institutional sales at Fortune Equity Brokers.

The fault largely lies with the economy. Growth of India’s gross domestic product fell to 5.5% in the quarter to June 30 after rising 8.4% annually for the two preceding fiscal years.

The government has cut its GDP forecast for 2012–13 to 6.7% from the 7.5%–8.0% range it had projected earlier. In the past, the government indicated that India needed annual GDP growth of 9% for sustainable economic expansion.

Reforms necessary

The situation on the fiscal front is equally unappealing. The government’s estimate of the fiscal deficit as a percentage of GDP for 2012–13 is 5.1%, but analysts remain sceptical.

In a research report, Morgan Stanley forecast a fiscal deficit of 6.1% in 2012–13, up from 5.9% in 2011–12.

“The individual stocks [indentified for disinvestments] are good in their own space and the valuations may also be attractive, but the market is in a punishing mood,” said Jigar Shah, head of research at Maybank Kim Eng.

In order to restore the appeal of the stake sales, bankers believe India needs to cut its high interest rates and implement reforms in the power and infrastructure sectors. These are the sectors in which most of the PSUs targeted for stake sales operate.

Instead, the government has been spending time fighting charges of corruption. Recently, the Comptroller and Auditor General of India alleged that the Congress-led federal government underpriced the sale of coal blocks and this may have cost the exchequer potential revenue of US$33bn.

Before the coal scandal, the government was accused of selling mobile phone frequency licences cheaply to benefit certain companies.

However, analysts are not entirely writing off the current year’s disinvestment programme. Prithvi Haldea, chairman of Prime Database, a provider of data on capital market offerings, said the recent appointment of P. Chidambaram as finance minister should infuse some life into the disinvestment process.

Chidambaram was the finance minister between 2004 and 2008 and is seen as more pro-reform than predecessor Pranab Mukherjee.

Haldea sees two possible catalysts for the disinvestment process. The first is the government’s commitment to reduce the fiscal deficit, especially in view of the risk of a ratings downgrade. The second is a recent stock-market requirement that public sector companies need to have a minimum float of 25% come August 2013.

In a research report, IDFC Securities said the government could be bolder in divesting. The target was to raise Rs300bn, but it could raise three times that from selling stakes of 10% each in the top 12 public-sector entities and lower the fiscal deficit 20%, it added.

The government has already taken some initiatives. The Department of Disinvestment, a division of the Ministry of Finance, has invited requests for proposals from banks for the offer of sale of stakes in state-owned National Aluminium and Neyveli Lignite.

The government plans to sell a 12.15% stake, or 313m shares, in aluminium-maker Nalco in the domestic market, to raise as much as Rs15.6bn, based on the stock price of Rs49.80 at the time of writing. The government currently owns an 87.15% stake in the company.

It also plans to sell a 5% stake, or 83.8m shares, in power developer Neyveli Lignite, in which the government owns an interest of 93.56%. At the last trading price of Rs78.05, the transaction will total Rs6.54bn.

Banks pitching for the Nalco offer must have handled at least one Indian equity issue of a size of Rs5bn between April 2009 and June 2012. Banks bidding for Neyveli Lignite need to have handled an equity issue of at least Rs2bn during the same period.

Proposals for Nalco have to be submitted on or before September 27 and for Neyveli Lignite on or before September 10. The department plans to select three bankers each for the Neyveli Lignite and Nalco divestments.

The government has also approved the sale of stakes in Tyre Corporation of India, Hindustan Copper, Steel Authority of India, Rashtriya Ispat Nigam, NMDC and Bharat Heavy Electricals, but has not provided any timeframe for this to be achieved.

The government filed the draft prospectus for the offer for sale of 489m shares in Rashtriya Ispat with the Securities and Exchange Board of India in May. UBS and Deustche Bank are lead managers.

A Hong Kong-based banker said the government was likely to reduce its stake in Nalco, Bharat Aluminium and Hindustan Zinc – in that order – before the Rashtriya Ispat selldown.

Shah at Maybank said the government could achieve 70% of its disinvestment target if it sold its residual 49% stake in Bharat Aluminium and 29.54% interest in Hindustan Zinc to Vedanta Resources, the majority shareholder.

However, the government’s earlier plans to sell stakes in Bharat Heavy, Sail and Indian Oil Corp are unlikely to get off the ground because of weak operating conditions in their respective industries.

Bharat Heavy has been fighting stiff competition from Chinese power equipment manufacturers and the slow development of power projects in India is showing on its earnings.

Local media recently quoted Praful Patel, the federal minister for heavy industries, as saying that the government had put the Bharat Heavy disinvestment on hold. In 2011, the government filed a draft prospectus to sell 24.4m shares, or a 5% stake. DSP Merrill Lynch, ICICI Securities, Kotak Mahindra Capital and Morgan Stanley were appointed lead managers. The government currently owns a 67.72% stake in Bharat Heavy.

Political, pricing challenges

The downturn in the global steel industry and the recent sharp fall in earnings have also dimmed the prospects of share sales in Sail and IOC. “Bharat Heavy and Sail have been listed for a long time and fresh sales are unlikely to create a huge buzz,” said Sandeep Shah.

The challenges to the sales can also come from the government itself. Although the MoF usually initiates share sales, the other ministries that own the respective PSUs have opposed the deals in the past, arguing that the stakes would be sold too cheaply.

Haldea said the government had to be careful not to flood the market with too many offerings and should also be more flexible in pricing the shares.

In March, the government was unable to get foreign investors interested in the sale of a 5% stake in Oil and Natural Gas Corp because it priced the offer at a premium. The sale went through with the support of state-owned institutions.