A rally that has added $102 billion to the market value of Indian state-owned companies this year is helping Prime Minister Narendra Modi raise cash from asset sales as oil prices and a weak monsoon weigh on the exchequer.
The S&P BSE India Public Sector Undertakings index comprising stocks of 59 state-run companies including Oil & Natural Gas Corp. (ONGC), the nation’s biggest explorer, has surged 46 percent this year, the most since 2009. That is more than double the pace of gains in the benchmark S&P BSE Sensex (SENSEX), which touched a record high on June 11.
The rebound is fueling optimism Modi will meet a target of raising 800 billion rupees ($13.3 billion) from reducing the government’s stakes in these companies this financial year. The cash from the sales may offset any potential revenue loss from below-normal rain crimping farm income and demand even as a conflict in Iraq threatens to boost crude oil prices and trigger a clamor for more fuel subsidies.
“An atmosphere has been created to unlock the value of all of these huge state-run companies,” ONGC Chairman D.K. Sarraf said on the phone. “This is going to help public finances.”
Bharat Petroleum Corp. (BPCL), ONGC, Coal India and Oil India Ltd. (OINL), a state-run energy explorer, are among the five biggest gainers in the MSCI Emerging Market Energy Sector index this year, surpassing Chinese government-owned companies China Petroleum & Chemical Corp. and PetroChina Co.
The combined market capitalization of Indian state-run companies on June 9 reached $338 billion, the most since January 2011, according to data compiled by Bloomberg.
The previous Congress party-led government of Manmohan Singh missed its divestment target in at least the last four consecutive years. It planned to raise 400 billion rupees in the 12 months ended March 31, and managed a less-than-half 158.2 billion rupees, according to the Department of Disinvestment’s website. The Sensex rose 9 percent in 2013 and 26 percent in the previous year.
In contrast, the Modi administration will raise its target for the year ending March 31 by about 41 percent to more than 800 billion rupees, finance ministry officials with direct knowledge of the matter said last week.
Adding urgency to the sales is a June 19 ruling by the capital markets regulator, requiring state-owned companies to increase their public shareholding to at least 25 percent within three years. The government will have to cut its stake in 36 such companies to comply with the decision, Securities & Exchange Board of India Chairman U.K. Sinha said the same day.
Among these are Coal India Ltd., the world’s biggest producer of the fuel used in power generation, and NMDC Ltd. (NMDC), India’s biggest iron-ore miner. The government owns 90 percent of Coal India and 80 percent of NMDC.
Cabinet notes have been sent for approval regarding 10 percent stake sales in Container Corp. of India and NHPC Ltd. (NHPC), and a note is ready on divesting stake in Coal India and ONGC, two finance ministry officials said June 25. More are planned for Hindustan Zinc Ltd. (HZ) and Bharat Aluminium Co. The government will also sell a 5 percent stake in Rural Electrification Corp. (RECL) and may list Hindustan Aeronautics Ltd.
“If the government were to sell shares in these companies, it would get a lot of interest from both domestic and international investors,” said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. in Mumbai, which manages about $150 million of assets. “The performances of state-run companies over the last half decade haven’t been good and that view may be changing with this government.”
Sanghavi’s fund bought shares of some of state-run companies after the federal elections in May, he said. They didn’t own any state-run companies before that.
Modi was sworn in on May 26 after his Bharatiya Janata Party won the biggest victory margin seen by any single party in 30 years on a campaign of reducing inflation, creating jobs and reviving Asia’s third-biggest economy from near the slowest pace of growth in a decade.
India’s economy expanded 4.6 percent in the quarter ended March 31 versus China’s 7.4 percent. Amid threats of a sovereign rating downgrade to junk, former finance minister Palaniappan Chidambaram had projected a budget deficit of 4.1 percent of gross domestic product for the current fiscal year, narrower than the 4.5 percent a year earlier. Modi’s government is due to present its budget on July 10.
Brent crude prices near a 10-month high may make Modi’s task difficult as the $1.8 trillion economy depends on oil from overseas to meet 80 percent of its needs. A persistent increase of 10 percent in crude oil prices may lead to about 100 basis points increase in inflation, according to rating company Credit Analysis and Research Ltd.
Governments in India, where the World Bank says about 70 percent of the population lives on less than $2 a day, have traditionally resorted to subsidies to help cap retail prices and shield the poor.
Selling fuels below cost caused a revenue loss of 1.4 trillion rupees to state refiners last year, of which 51 percent was borne by the federal government and the rest by explorers.
Signaling its resolve to take unpopular decisions and mend state finances, the government increased railway passenger and freight charges last month by as much as 14.2 percent.
“The advantage of having a government with a majority is hard and necessary economic steps can be taken,” Ambit’s Sanghavi said. “Modi is showing he’s going to focus on reducing subsidy and the fiscal deficit.”
A deficit in rainfall combined with high oil prices may undermine economic recovery, and the government should use the money raised from stake sales to modernize the nation’s infrastructure, said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a government-backed research institute in New Delhi.
Monsoon showers in the June-September season will be 93 percent of a 50-year average, the state-run India Meteorological Department said June 9. Rainfall below 96 percent of the average is considered sub-normal. An estimated 833 million of the 1.2 billion Indians depend on agriculture for their livelihood, and the June-September monsoon is the main source of irrigation as 55 percent of crop land is rain-dependent.
The country had the lowest June rainfall since 2009 last month, the IMD said yesterday.
“It looks like a good time to sell shares, and if disinvestment proceeds go to build infrastructure, it’ll definitely boost growth,” Bhanumurthy said.