The floor price for the government’s stake sale in Steel Authority of India (SAIL) was on Thursday fixed at R83 a share, a slight discount to the stock’s closing price of R85.35. With this offering, the government has kicked off its R58,425-crore disinvestment plan for FY15.
The government is offering 20.65 crore shares through the offer-for-sale (OFS) route, which would bring down its stake in the steelmaker to 75% from 80%. The OFS is expected to fetch R1,714 crore to the exchequer. Retail investors will be offered shares at a 5% discount to the bid price.
HSBC Securities, Deutsche Equities and JPMorgan India are among the six merchant bankers advising the government on the stake sale. Market watchers believe that LIC could play a key role in the disinvesment process. With around R30,000-40,000 crore of paper expected to hit the market in the next four months, the supply could be fairly large, they say.
In the recent past, LIC is believed to have encashed some of its equity holdings, ahead of the government’s FY15 divestment plan. In 2013, the government sold shares in seven PSUs through the OFS mechanism. While stake sales in NTPC and SAIL added close to R12,900 crore to the exchequer, LIC is believed to have supported the dilution, especially in case of SAIL.
Net outflows of R7,826 crore, or $1.3 billion, have been reported by domestic institutional investors in November.
According to BSE filings, LIC’s stake in SAIL jumped from 4.93% to 7.94% during the quarter ended March 2013, while that in NTPC increased from 6.2% to 7.66%.
Meanwhile, some analysts are advising clients to stay away from the OFS as they believe the stock is already at expensive valuations. “We expect softer raw material prices globally to keep the pressure on global steel prices, which, in turn, would keep domestic prices muted due to the risk of import substitution,” Ambit Capital said in a note. This, coupled with rising domestic steel production, is unlikely to materially increase the margins of domestic steel players, said Ambit, which reiterated its ‘sell’ rating on the steelmaker with a target price of R62.
“The stock is currently trading at an expensive FY16 EV/EBITDA of 6.9x vs the historical average of 5.7x,” it added.