Although foreign institutional investors are clearly confident about the India story, having shopped for stocks worth more than $12 billion since April, the government’s disinvestment programme, which kicks off on Friday, may need to be supported by Life Insurance Corporation (LIC).
The government hopes to net a sum of R63,425 crore by selling shares in, inter alia, ONGC, Coal India, SAIL, NHPC and the residual stake sales in Balco and Hindustan Zinc, along with some shares of Axis Bank held by SUUTI.
Merchant bankers point out that unless shares of the PSUs are priced attractively and the government offers meaningful discounts, the stake sales might not see too many foreign buyers. That’s because the fundamentals of most companies — Coal India, SAIL and ONGC — aren’t too strong given the regulatory uncertainty and falling prices of commodities. Moreover, many of the stocks have had a fairly good run over the last seven months.
Stocks like ONGC have, however, underperformed the broader market in the last three months in anticipation of the upcoming share sale, the steep drop in the price of crude oil and uncertainty over the subsidy sharing formula. The stake sale could turn out to be a success if the mechanism results in a smaller subsidy burden for the oil explorer. The government is planning to sell a 5% stake in ONGC for around R16,000 crore.
Friday’s offer for sale (OFS) of shares of SAIL will be the first issue after Sebi changed the rules for this mechanism, reserving 10% of the issue for small investors and allowing them a 5% discount. However, with the government fixing the floor price at R83 apiece, only a slight discount to the closing price of R85.35, not too many investors might be interested, merchant bankers said. “The pricing is very tight,” remarked one merchant banker, adding that a 5% discount for retail buyers might not be enough to prompt them to bid.
Brokerages have highlighted the fact that falling iron ore prices could keep steel prices under pressure.
The SAIL stock has gained 20% since April although it has underperformed the Sensex, which has rallied 28%. At the floor price, the sale will fetch the exchequer Rs 1,714 crore.
A 10% stake sale in Coal India estimated to fetch close to Rs 22,000 crore could be challenging, merchant bankers said. Brokerages have drawn attention to the fact that the miner’s production volumes have been languishing in low double digits without a plan for ramping up production and that there is little clarity on the status of e-auctions. There is also concern on incremental sales to the power sector at a lower price point.