For five straight years, the government has missed its divestment target. Keeping that in mind, the overwhelming success in the stock sale of state-run power financing firm REC Ltd last week marked a rare early start to a string of divestments planned by the government for the financial year that began on April 1, all of which add up to a record disinvestment target.
The two takeaways from the REC issue are: an appetite for well managed Offer for Sale (OFS) issues if valuations are attractive — the floor price for the REC stock at Rs 315 a share implied a conservative valuation of less than one times the company’s estimated book value for the 2016 financial year. The other impressive aspect of the REC issue was that the price of the underlying stock moved up when the issue was on, a departure from the general trend. Typically, in an OFS issue, when a huge quantity of supply of shares is being offered into the market (about 4.93 crore shares in the REC issue), the market price is hammered down to closer to the reserve price.
In case of the REC issue, the market moved up on the day of the issue and closed at Rs 330.30, as against the previous day’s closing of around Rs 321. This, when the the institutional indicative price for the issue was Rs 322.97 and the retail price was Rs 324.72, both above the previous day’s closing price of the stock.
Both overseas and domestic portfolio investor demand for REC’s shares exceeded supply, with investors, retail as well as institutional, bidding for more than 273.1 million shares of REC versus the issue size of about 49.3 million, exchange data showed. The institutional portion was oversubscribed 4.66 times, while the retail portion saw the record subscription of 9.02 times.
So while the government was expecting around Rs 1,500 crore from the issue, the oversubscription added up to about Rs 7,621 crore — more than five and half times. The success of a secondary market issue holds out promise for the primary market as well, with recent filings suggesting a sharp turnaround in the sentiment in the IPO market.
On the first day of this financial year, six companies are reported to have filed IPO documents. In 2014-15, companies raised Rs 2,769 crore, according to data from market tracker Prime Database, as compared with just Rs 919 crore in 2013-14, the worst year for IPOs in the past decade and a half.
Plus, the success of the REC issue augurs well for the government’s resolve to meet its fiscal deficit target of 3.9 per cent of gross domestic product this fiscal. In his 2015-16 Budget, Finance Minister Arun Jaitley targeted Rs 41,000 crore from minority stake sales in listed public sector undertakings (PSUs) and a further Rs 28,500 crore in ‘strategic sales’. This combined target of Rs 69,000 crore is the highest ever disinvestment target of a government for a single financial year.
These include the sale of government holdings in non-government commercial entities, Specified Undertaking of UTI, Bharat Aluminium Co. Ltd and Hindustan Zinc Ltd. “Over the medium-term framework, an amount of Rs.55,000 crore and Rs.50,000 crore has been estimated for 2016-17 and 2017-18, respectively,” the medium-term fiscal policy statement had noted. Jaitley, in his budget speech, had said the budget reflects considerable scaling up of divestment figures, which includes both disinvestment in loss-making units and some strategic disinvestment.
Apart from REC, those in the indicative disinvestment list for this fiscal include PFC, Dredging Corp Of India, Indian Oil, Bharat Heavy Electricals, National Aluminium, NMDC, MOIL, NHPC and Oil & Natural Gas Corporation (ONGC), among others.
Cabinet approvals have already been accorded and Requests For Proposals for merchant bankers have been issued for most of these issues. Some of the others that could see minority stake sale this year are Neyveli Lignite, Hindustan Copper and MMTC. A five per cent stake sale in ONGC was planned for 2014-15 but got delayed because of sluggish oil prices and the expectation of clarity on the subsidy sharing mechanism.
For investors, the valuation of the issue holds the key. If the REC issue is an indicator, the upcoming divestment issues could offer a good opportunity to buy into some of the better-performing PSU stocks.