A dismal outlook for the metal industry and concerns over high valuations have raised doubts on the success of SAIL and Nalco stake sale plans. According to persons who are part of the stake sale process, institutional investors are likely to give a lukewarm response to the issues, given the gloomy outlook of the sector and its broader under-performance to the market.
According to investment bankers managing the deals, overseas investors did not provide a positive feedback on these issues during roadshows in Hong Kong, the UK, the US and Canada. They add that even domestic financial institutions, including LIC, are also not showing much interest in the metal majors. LIC played a major role in bailing out stake sales of Hindustan Copper (HCL) and NMDC. It is believed that LIC bought shares worth R350-400 crore in HCL and R1,400 crore in NMDC.
?Overseas investors are not too keen on bidding even if these issues offer a discount to the market price… Metal companies are not being fancied because they have taken a beating. It will be challenging for the government to successfully push through these issues,? said an investment banker on condition of anonymity.
The government is looking at diluting its stake in Nalco, MMTC, Rashtriya Chemicals and Fertilisers (RCF) and SAIL later this month. It plans to offload 12.5% of its stake in Nalco in the second week of March that would fetch the exchequer roughly R1,400 crore. The Centre also plans to sell 10.82% stake in SAIL worth R3,500 crore.
However, unlike NMDC that enjoys dominance in the domestic iron ore market, off-loading stakes in steel and aluminium producers could prove to be a difficult task. The financial performance of metal companies in the last two years has deteriorated, thanks to demand slump, amid a high interest rate environment. As a result, net earnings of most metal producers have shrunk, weighing on their stock prices that have corrected anywhere between 35% and 60% in the last two years.
According to Rakesh Arora, MD and head of research, Macquarie Captial Securities, while there is substantial supply globally, the demand for metals remain muted, barring activity in China. ?This imbalance is likely to keep a lid on metal prices and the stock performance of Indian players would be driven by volume growth,? said Arora.
Some traders said that the market response to the Nalco stake sale, in particular, may be tepid, as sourcing of coal is a key operational trouble affecting the financial performance of the company, while the management style remains ?anemic or passive?.