Indian power firm NHPC Ltd will kick off a $1.25 billion IPO next week in the first share sale by a state company since the Congress party’s unexpectedly strong re-election in May spurred investor hopes for pro-market reforms.
Despite opposition from labour groups and leftist parties, the government is forecast by some watchers to offload roughly $5 billion a year in state shares, which could hearten a bond market worried about fiscal responsibility but do little to address a yawning deficit and $90 billion borrowing plan.
Uncertainty over how stake sale proceeds can be used also clouds the outlook for any benefit to government finances.
“It is not a huge amount given the size of the government borrowing. But I think it could substantially change sentiment in the debt market,” said Abheek Barua, chief economist at private sector lender HDFC Bank.
“What the market is likely to price in is the prospect of larger disinvestments going forward,” he said.
Investors are expected to lap up shares in government firms, given attractive pricing, a record of outperformance relative to IPOs by private firms, and a roaring stock market run since March that has been fueled by an influx in foreign funds.
NHPC opens its IPO on August 7 in what would be the first for a state firm in India since Feb. 2008. Oil India is expected to follow with a $500 to $600 million issue in September.
Also in the works could be a multi-billion-dollar IPO by telecoms firm Bharat Sanchar Nigam Ltd and secondary offerings by power equipment maker Bharat Heavy Electricals, Rural Electrification Corp, trading firm MMTC Ltd and mining firm NMDC Ltd.
“Government deals typically have done well. Government a couple of times has been credited with reopening the IPO markets,” said Vedika Bhandarkar, head of India investment banking at JPMorgan.
The pipeline of equity from state firms promises to top the record $6 billion raised from government asset sales between 1999 and 2004 when the pro-business Bharatya Janata Party (BJP) was in power. During that period, shares were sold in firms such as Oil and Natural Gas Corp and Maruti Suzuki.
Since then, the government raised just $1.4 billion as allies of the ruling coalition and labour unions thwarted plans for stake sales.
“We could see issuances in infrastructure, power, mining and agricultural sectors followed by banks and insurance companies,” said A. Murugappan, executive director at ICICI Securities.
PRICED TO PERFORM
Government offerings typically come with attractive valuations, ensuring healthy investor returns.
NHPC, which produces 4,815 megawatts and has 11 projects under construction that will nearly double its capacity, will be priced at twice its book value at the top end of the range.
That compares to nearly 4 times book for Adani Power, which has little operational capacity and is building plants to produce 6,600 megawatts, analysts said. Adani is raising up to $625 million in India’s largest share sale in more than 18 months.
Local banks SBI Capital Markets, Enam Securities Pvt Ltd and Kotak Mahindra Capital are managing NHPC’s offering.
Indian state companies that listed between 2004 and 2009 have shown share price gains on average of 140 percent compared with just 3.5 percent for their private sector peers, according to a study by SMC Capitals, a deal tracking firm.
“There will be quite a bit of interest for state-run firms from Indian and foreign investors. The macro picture has changed, the economy seems to have bottomed, there is ample liquidity,” said Sashi Krishnan, chief investment officer at Bajaj Allianz Life Insurance. He oversees $4.5 billion in funds.
“State firms have a large retail portion and typically leave something on the table for investors. If the offer is at a significant discount to the secondary market, and with foreign funds looking to raise India exposure, it will see good demand.”
NO FISCAL PANACAEA
Investors were disappointed in early July when the government’s budget contained few details on its disinvestment plans, beyond pledging to maintain controlling 51 percent stakes.
Even so, a few billion dollars from asset sales would be a drop in the bucket as New Delhi copes with the highest fiscal deficit in 16 years and benchmark bond yields that have shot up 165 basis points in 2009 on worries over heavy borrowing.
Complicating matters is a rule that requires all government divestment proceeds to go into the National Investment Fund (NIF), which is managed by mutual fund units at state-run firms.
According to official guidelines, 75 percent of the income from the NIF is used for funding social sector schemes to promote education, health and employment, while the residual amount is invested in state-owned firms that can be revived.
By comparison, Chinese state companies, which dominate issuance there, are required to give 10 percent of their IPO shares or proceeds to the national pension fund.
Many observers expect the rules in India to change.
“There needs to be more clarity on what is going to happen to the NIF, because till now… they say they are not going to change the NIF arrangement,” said A. Prasanna, economist at ICICI Securities Primary Dealership.
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