India plans to raise $2.5 billion by offering a stake in Oil & Natural Gas Corp. (ONGC) in the first auction of a state-run company’s shares as the government seeks to narrow a budget deficit that’s already exceeded its target.
The 427.77 million ONGC shares, equivalent to a 5 percent stake, are being sold at a minimum price of 290 rupees each, a 1.1 percent discount to yesterday’s close. The stake in India’s biggest energy explorer is valued at 124 billion rupees ($2.5 billion) at the floor price.
The country’s fiscal deficit topped the target for the financial year in the 10 months through January, adding pressure for steps to restrain the gap. Foreign funds have been net buyers this year, driving the benchmark Sensitive Index (SENSEX) to a seven-month high in February and paving the way for Finance Minister Pranab Mukherjee to revive asset sales aimed at raising 400 billion rupees in the year ending March 31.
“If this auction is successful, and I think it will be, this will become the most preferred route for state-company stake sales,” said Kamlesh Kotak, vice president of research at Asian Markets Securities Pvt. in Mumbai. “This could even help boost the overall market as more foreign investors come in.”
Foreign investors have poured $7.2 billion into stocks this year and $4.8 billion into debt, data from the regulator show. Flows into equities in February totaled $5 billion, the most since September 2010.
ONGC rose 3.5 percent to 293.20 rupees, the highest since May 16, in Mumbai yesterday. The stock has climbed 14 percent this year. The index tracking shares of 60 Indian state-run companies gained 1.5 percent to the highest since Feb. 21.
Mukherjee’s plan to cut the budget deficit to a four-year low of 4.6 percent of gross domestic product has been hampered by higher spending and lower revenue collection as economic growth slows. India’s economy expanded at the slowest pace in more than two years last quarter, the Central Statistical Office said yesterday.
The government has raised 3 percent of the target from stake sales. Offerings in companies including Bharat Heavy Electricals Ltd. (BHEL), Steel Authority of India Ltd. and Hindustan Copper Ltd. were delayed after the Sensex’s 25 percent decline last year. The government in November scrapped a plan to sell a 5 percent stake in New Delhi-based ONGC in a public offering.
The state raised 152 billion rupees in October 2010 in a Coal India Ltd. initial public offering, the country’s largest.
The Securities and Exchange Board of India, the market regulator, announced rules for the sale of shares through auctions to institutional investors on Feb. 1.
“The auction route reduces a three-month share sale process to two days,” Kotak said. “There’s negligible paperwork, no long road shows and issues can come quickly to the market.”
ONGC declined 20 percent in 2011 amid concern that its fuel subsidy burden is mounting. The explorer’s discounts on oil sales to state refiners, offered as compensation for selling fuels below cost, tripled to 125.4 billion rupees in the quarter ended Dec. 31, reducing profit by 72 billion rupees.
Still, ONGC shares may be attractive because its price-to- earnings ratio is the fourth-lowest among the 30 Sensex companies, making it cheap, according to Geojit BNP Paribas Financial Services. ONGC is trading at a one-year price-to- earnings ratio of 9.4 compared with 15.7 percent for the Sensex.
“ONGC’s valuation is below its real worth and that will be an incentive for investors to buy,” said Alex Mathews, Kochi- based head of research at Geojit BNP Paribas. “There is a belief that the government will liberalize fuel pricing at some point and that will boost ONGC.”
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