Banking on big-ticket disinvestment

Written by Santosh Tiwari | Updated: Oct 22 2014, 10:34am hrs
From statements such as we are not going to rush through disinvestment, the finance ministry officials, now filled with new-found exuberance and confidence, have switched gears to drive home the point that the record R63,425 crore FY15 government stake sale target would be met.

Talk to the ministry officials and they will tell you: We just need to hit two-three sixes (big-ticket government stake sales in companies like ONGC and Coal India) to meet the target with a few small ones in the pipeline, beginning November.

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But what has changed suddenly, prompting this confidence The answer lies in the governments willingness to remove the hurdles in the way of maximising gains from disinvestment.

Take the case of ONGC, which is likely to be the first on the block this year; last weeks gas price hike by the Cabinet is being seen as a big help for the company. While the higher natural gas price ($5.61 per mmBtu from

November 1 as against $4.2 per mmBtu now) means additional profit in the remaining five months of the financial year for the PSU oil and gas behemoth, diesel price deregulation will allow it to save on the subsidy front.

These would certainly improve the companys valuation and, if the market remains the way it is at present, the planned 5% stake sale in ONGC will fetch government about R20,000 crore.

Similarly, in the case of Coal India, officials say the government is in the process of appointing a chairman and managing director soon. The post has been vacant since May and the new CMD is expected to sort out issues raised by the unions and guide the disinvestment process effectively.

The proposed divestment of 10% government stake in the coal monopoly is slated to yield close to R24,000 crore.

Clearly, if the government succeeds in getting the ONGC and Coal India disinvestments through in the next five months, not only this will be a record by a big margin for the whole disinvestment programme since 1991-92, it would also ensure the government meets the target for this year.

But that will only happen if everything goes the way the government has planned. There is no doubt that the current government has set the ball rolling in terms of reforms in different areas, be it diesel deregulation or movement towards coal denationalisation, and the chances of it succeeding in its plans appear to be more than the previous governments; taking the disinvestment target completion as a done deal may not be a good idea.

The good part is that even if the government succeeds in divesting its stake in any one of these two companies, it has other options to meet the FY15 target, which is substantially higher than R25,890 crore realised in FY13 and that of R25,841 crore in FY14.

The biggest cushion to fall back on is the sale of a larger portion of the stakes in the Specified Undertaking of the Unit Trust of India (SUUTI).

As per the budget plan for FY15, it is estimated that R36,925 crore will accrue to the National Investment Fund from disinvestment. Then, R15,000 crore is expected from disinvestment of residual government share in non-government companies, HZL and Balco. The other non-debt capital receipts include loan repayments by the state governments and central ministries. So, the miscellaneous capital receipts, accruing to the government kitty on account of its share in the central public sector enterprises, were pegged at R56,925 crore in the interim budget estimates 2014-15.

With the addition of R6,500 crore to be realised from the sale of stakes in SUUTI, the total amount estimated under disinvestment works out to be R63,425 crore.

As the current valuations suggest that a complete dilution of the government stakes in SUUTI will yield over R55,000 crore, the government has

been conservative in targeting only R6,500 crore on this count this year; nevertheless, this provides a fallback plan.

Though the government would like to keep this option with itself going ahead as it has estimated in the medium-term framework to collect R55,000 crore from disinvestment in FY16 and also in FY17, it would be a good idea to work on a plan B, entailing a higher SUUTI stake sale in the current financial year itself.

This is also necessary because of the fact that there has been little movement on the disinvestment front in the current year, mostly because of the change of guard at the Centre and the lack of confidence on getting the best returns in an environment replete with policy uncertainty.

So, while the government is taking decisions to help boost PSU valuations before divestment, it is difficult to time the market, and it needs to factor in this reality into its disinvestment strategy.