Government Green-Lights Divestment In Four PSUs
DSIJ Intelligence / 20 Sep 2012
The government recently gave its nod for divestment in four public sector companies, including its flagship Oil India, to raise up to Rs 15,000-18000 crore at the current market price
The government recently gave its nod for divestment in four public sector companies, including its flagship Oil India, to raise up to Rs 15,000-18000 crore at the current market price. The others that have been named for the disinvestments are Nalco, MMTC and Hindustan Copper. As per news reports, the government is expected to sell 10 per cent stake in Oil India, close to 10 per cent in Hindustan Copper, 12-15 per cent in Nalco and 9.33 per cent in MMTC. The Indian government is now in the mood for reforms and has already planned for the share sale of SAIL and the new issue of Rashtriya Ispat Nigam Ltd (RINL) in the coming months.
| Company | Current Govt Stake (%) | Dilution (%) | Stake After Dilution | CMP | Amount To Be Raised |
|---|---|---|---|---|---|
| NALCO | 87.15 | 15 | 72.2 | 54 | 315 |
| Hindustan Copper | 99.59 | 10 | 89.6 | 267 | 2,902 |
| MMTC | 99.33 | 9.33 | 90.0 | 762 | 7,109 |
| Oil India Ltd | 78.43 | 10 | 68.4 | 475 | 7,916 |
After the news the stocks of the four companies moved higher by 2-3 per cent. The government was trying hard in the past to start the disinvestment process through a stake sale of SAIL and the new issue of RINL but failed to do so due to bad market conditions and high volatility in the markets. The government had to postpone the initial public offer (IPO) of Rashtriya Ispat Nigam Ltd (RINL) due to weak stock market conditions. The RINL issue of Rs 2,500 crore was initially planned to hit the markets in July 2012. But on the back of the uncertain market conditions, the government could raise only Rs 14,000 crore from disinvestment against the target of Rs 40,000 crore.
So the question that arises is whether government should go for the disinvestment process now or wait for some more time. We believe that with the stock market looking good after the domestic reform measures and the U.S. Federal Reserve’s action by way of QE3 easing, the environment is looking much conducive for the sell-off.
Most of the above mentioned companies are from the metal space. And the metal sector has not been doing well in the last one year. The BSE metals index is down by 15 per cent from a year ago while the benchmark Sensex is up by 9 per cent. And on an YTD basis the Sensex is up by 19 per cent while the metal index is up by 12.46 per cent. The metal indices have underperformed the Sensex and we believe that the disinvestment in metal stocks at this juncture may face issues such as attracting investors’ interest.
The metal industry, both ferrous and non-ferrous, has not been doing well due to weak demand, falling metal prices and high cost of servicing debt. However, in the weak sector scenario we also have to look at the government situation where it does not have the luxury to be able to wait for long as it has to meets its budgeted fiscal deficit of 5.1 per cent by the end of the fiscal year 2013. And if any disinvestment is a success, this will set the momentum for others as well.
| Returns | ||
|---|---|---|
| Particulars | Last One year | YTD |
| Sensex | 9.3 | 19.4 |
| Metal | -13.9 | 12.5 |
| SAIL | -20.2 | 6.2 |
| Hindustan Copper | 15.9 | 44.7 |
| MMTC | 10.3 | 44.8 |
| Oil India Ltd | -12.8 | 1.5 |
The disinvestment in the states’ PSUs will be a great move in order to control the rising fiscal deficit of the country which has crossed the level of 6 per cent in 2012. With the disinvestment process the government is planning to bring down the fiscal deficit to 5.1 per cent by the end of the fiscal year 2013. The market sentiment has picked up over the past couple of months, the BSE Sensex has rallied more than 19 per cent so far in 2012 and this seems to be the right time for the government to bring up the disinvestment process.
The government has budgeted Rs 30,000 crore from disinvestment in the current year but has only six months into the financial year apart from getting the cabinet approval for a stake sale in SAIL. The budget for 2012-13 had pegged the fiscal deficit at 5.1 per cent of the GDP for 2012-13. A substantial discount has to be in the offer in order sell large stake of equity at such times. Investors will look for an incentive to subscribe if the discount is attractive and if the government gets its act right for one issue, it will generate a positive buzz for the subsequent ones.
However, one thing that remains a concern is the implementation of the disinvestment plan as in the past the government has failed with its plans. One can only hope that it will go with the implementation without much delay.
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