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An Era of PSU Disinvestment Starts With SAIL OFS

December 5, 2014

An Era of PSU Disinvestment Starts With SAIL OFS

 

The Government of India initiated its ambitious disinvestment programme for the FY 2014-15 with an offer for sale (OFS) of a 5 percent stake in SAIL (Steel Authority of India Ltd). Apart from SAIL, the Government intends to put up part of its stake in companies such as Coal India (5 percent), Oil and Natural Gas Corp Ltd (ONGC) (10 percent), and NHPC (11.36 percent) by early next year.

The entire disinvestment programme for this fiscal year is designed to bring about INR 58,000 crore into the Government coffers. INR 42,911 crore is the expected collection from the sale of the Government’s stakes in the four public major sector companies – SAIL, Coal India, ONGC, and NHPC. The matter of sale of the stake in a number of smaller companies has not been finalized yet. The Government has plans to raise INR 5,210 crore from the sale of 5 percent stake in MOIL Ltd, Rural Electrification Corporation Ltd (REC), Power Finance Corporation Ltd (PFC), and other Government undertakings. The Government seems to be pinning much better hopes on its disinvestment plans for Hindustan Aeronautics and Rashtriya Ispat Nigam which could together yield INR 11,000 crore. Apart from all this, the Government also plans to sell part of the stake it holds in companies such as Axis Bank, ITC, and Larsen & Toubro through UTI (Unit Trust of India) and raise INR 6,500 crore in the process.

Why does the Government want to disinvest?

Soon after the ascendancy of the NDA at the Centre, in his maiden budget as the Finance Minister, Arun Jaitley declared that his administration would aim at achieving an ambitious fiscal deficit target of 4.1 percent (of the GDP). In an effort to achieve this, the ministry has been attempting to exhaust every possible effort. The climb has been quite an uphill one for most departments. In case of the Income Tax department, for example, a revenue of only about INR 6.54 lakh crore has been garnered in the first six months of the fiscal year. This means that the department will need to work overtime to meet the INR 9.77 lakh crore target in the remaining six months. The Government’s disinvestment plans were an important part of the revenue estimates drawn up by the Government in the budget and it looks likely that the FM will go through with them.

What is the SAIL OFS?

Through the SAIL OFS, the Government of India hopes to mop up about INR 1,700 crore from the markets. The Government held about 80 percent of the stake in SAIL prior to the OFS and this is likely to come down to 75 percent. The sale of these 206.5 million SAIL shares shall be conducted through an auction on the stock exchanges. The floor price for the SAIL OFS auction has been set at INR 83 per share – at a discount of about 2.75 percent on Thursday’s closing price of the SAIL scrip at the BSE (85.35). Almost about 10 percent of the shares on sale have been reserved for retail investors who shall be offered a discount of 5 percent on the issue price and will be eligible to buy shares of INR 2 lakh at most. A minimum of 25 percent of the shares are reserved for sale to insurance companies and mutual funds. By close of session on Friday, December 5, 2014, the offer was oversubscribed both at the NSE and the BSE.

Is the SAIL OFS for me?

The SAIL OFS comes at a time when the global and domestic demand for steel is subdued. Will the Indian retail investor want to buy the SAIL scrip at such a time? Let’s take a look.

There are no major indications for change in the domestic demand for steel over the next year and half. Supply is, however, likely to increase at a fast pace. The Indian steel industry capacity is likely to increase by six or seven percent in the forthcoming year but the lack of simultaneous increase in demand will ensure that SAIL faces a tough challenge when it comes to maintaining its YOY results. The SAIL stock’s valuations are estimated to be on the higher side with the PE (price-to-earnings) pegged at about 10 times the company’s FY16 estimated earnings. A number of major brokerage houses have, however, advised clients to go short on the scrip with an expectation to pick it up at a lower value in the auction (or lower still at the end of the OFS). Others have issued a Hold call for the scrip.

SAIL has, however, been a stable company which enjoys Government backing and solid fundamentals. In the quarter ending September 2014, SAIL posted an EBITDA (earnings before interest, taxes, depreciation, and amortization) of INR 1,336 crore (up 54 percent) compared with the same period last year.  Long term investors could look at acquiring the stock at around the floor price. With long term increase in steel demands, the returns on investment could be attractive.

More to come

While from a retail investor’s point of view buying into the stocks of ONGC, Coal India and NHPC during the Government’s disinvestment offer may seem to a bright choice, there are a number of hiccups that shall need to be sorted out before the stake sale may be successfully processed. In September, Coal India workers went on a strike to protest against the Government’s disinvestment in the company. Retail investors interested in Coal India and NHPC should be ready to hold for a 2-3 year range for optimum returns. Experts believe that with smart financial planning, the Finance Ministry must be able to make the most of this year’s disinvestment programme.

The OFS of SAIL shares is a great opportunity for the Government of India to judge the appetite of the retail equity investors for PSUs and tempermental sectors.


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