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Vanguard to Aberdeen Bet on Singh’s Asset Sales: Corporate India

Overseas funds are raising holdings in India’s state-controlled companies to a two-year high as Prime Minister Manmohan Singh’s government sells stakes and attracts investments to revive the weakest economy in a decade.

Stakes of money managers including Vanguard Group Inc. and Aberdeen Asset Management Plc. (ADN) in the 40 biggest companies on the 60-member S&P BSE India PSU index was an average 8.37 percent at the end of March, the highest level since December 2010, data compiled by Bloomberg at the end of May show.

Oil & Natural Gas Corp. (ONGC) and Oil India Ltd. (OINL) are among the top performers this year on the gauge of state companies after the government in January eased controls on diesel prices as part of a policy push to spur growth. Singh plans to raise 400 billion rupees ($6.8 billion) by March selling state assets to narrow the widest budget gap among major emerging economies.

“Foreign funds are investing in public-sector companies ahead of a significant government move to divest as the value of these units is likely to increase significantly once they are divested,” John Praveen, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, wrote in an e-mail. “The government has taken steps to improve the investment climate,” he said, citing moves to pare subsidies and open retailing and aviation to further foreign investment.

Funds’ stakes in the 40 companies fell to an average 7.31 percent at the end of June 2012, a three-year low, amid concern the government, beset by policy logjam and graft scandals, was sacrificing shareholder returns while trying to revive growth.

Coal Prices

The Children’s Investment Fund Management, a London-based hedge fund, sued the government and Coal India Ltd. (COAL) in July, alleging state directives on keeping prices unchanged to shield utilities from higher raw-material costs hurt its investment in the miner. ONGC said in May last year its annual profit would have almost doubled had it not been for the discount offered to refiners on oil supplies. Net income rose 33 percent in the year ended March 2012.

Foreigners’ stakes in Coal India stood at 5.44 percent as of March 31, 2013, unchanged from a year ago. The company last month raised prices for the first time in more than two years, saying that the increase will add about 21.2 billion rupees to revenue in the year that started April 1. The government plans to raise 200 billion rupees selling 10 percent of the miner, paring its holding from 90 percent.

“State enterprises tend to socialize shareholder profits via subsidy or investment in projects with low internal rates of return; so when there’s potential for a step-like change in profitability due to reform, the sector is bound to attract interest and fund flow,” Masha Gordon, who oversees $2 billion in assets as London-based head of emerging-market equities at Pacific Investment Management Co., said by e-mail on June 17.

ONGC Stake

Foreign funds held 6.27 percent of ONGC as of March 31, up from 5.35 percent a year ago and the highest since the quarter ended September 2008. Vanguard, the world’s top mutual-fund company, added more than 17 million shares to take its stake in the company to 0.6 percent as on March 31, the data show.

Funds’ stake in Oil India climbed to 7.65 percent at the end of the last quarter, from 1.83 percent on March 31, 2012. The funds owned 1.91 percent in Indian Oil Corp. (IOCL), the largest refiner, compared with 0.88 percent a year ago. Aberdeen held 9.24 percent of Container Corp. of India on May 31.

Attractive valuations may have lured offshore funds to state companies, according to Andrew Holland, chief executive officer at Ambit Investment Advisors Pvt. in Mumbai.

‘Beaten Down’

“Some of these stocks, like those in the banking sector, were beaten down quite a lot and the price-to-book was quite low,” Holland said by phone. “Maybe that’s why we’re seeing some pick up there.”

The PSU index is valued at 8.1 times estimated earnings, compared with 13.6 times for the benchmark S&P BSE Sensex (SENSEX), data compiled by Bloomberg show. The Sensex has dropped 1.1 percent this year versus the 15 percent slump in the PSU measure.

Foreigners raised stakes state-run lenders including State Bank of India, the nation’s largest, Punjab National Bank and Bank of Baroda in the March quarter, the data show.

The increase in overseas holdings isn’t limited to state companies. Average foreign stake in the nation’s biggest 200 companies was 17.9 percent on March 31, the highest quarterly proportion since Bloomberg began compiling the data in 2009. Inflows of $14.9 billion into Indian equities this year is the second-highest among 10 Asian markets tracked by Bloomberg.

Singh and Finance Minister Palaniappan Chidambaram have changed policies since September to spur growth and avert a downgrade of the nation’s credit rating. Chidambaram last week signaled more policy changes to revive growth and said measures are being taken to stabilize the currency that touched a record low on June 11. Fitch Ratings upgraded India’s credit-rating outlook to stable from negative on June 12.

“Clients I meet are interested in the reform agenda in India and there’s a perception that the government is starting to make some progress in that regard,” Jonathan Garner, chief strategist for Asia and emerging markets at Morgan Stanley, said in an interview in Mumbai on June 5. “It’s not surprising to me that they are accumulating some of these names.”

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net;

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.

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