With emerging markets finding themselves on the wrong side of a Fed rate rise and a Chinese devaluation the Indian government has decided to raise cash to boost growth via disinvestment in listed Public sector undertakings with Indian Oil being the first on the block. While the current administration was always partial to speeding up disinvestment, the move comes amid warnings about India’s growth owing to a weak monsoon by Moody’s.
Other factors prompting this move are, finance minister Arun Jaitley strict insistence on reducing India’s 4% union budget deficit and Reserve Bank Of India governor Raghuram Rajan’s conservative approach to interest rate cuts. This does not aid a private sector reeling from high debt at the lower end of the business cycle. There are also recent announcements to recapitalise India’s public sector banks (to boost lending), whose books contain plenty of bad loans made to farmers and crony capitalists alike. Clearly money has to be raised from somewhere to meet the said obligations.
While disinvestment in the long run is a step in the right direction towards ensuring better accountability and governance of the sold entities, one has to wonder about the timing and purpose of the new cycle of disinvestment. It is no secret that Prime Minister Modi’s major economic reforms from the GST to the Land Bill have been blocked in the upper house of parliament where his party lacks the numbers. The big bang which investors had hoped for post a landslide electoral win in the general elections in 2014 has not arrived. There are also issues regarding sentiment about the Indian stock market. Concerns regarding the global economy have recently wiped out all gains made in the year to date. Not the best of time for a rights issue.
Keeping points above in mind the Indian government has priced the Indian Oil stake to sell at ₹387 per share. After retail investors have been offered a 5% discount to the cutoff price the P/E ratio works out to be 8.6, which is quite modest. One can’t help but believe that the stake is being undervalued. Maybe the government is testing the waters in a bear market to check for demand for other rights issues such as Coal India in the immediate future? Maybe it is an attempt to pacify investors for failing to pass reform and building sentiment by setting India aside from other emerging markets? Either way only time will tell if the Indian government plans to kill multiple birds with one stone. A successful sale and signal will see many more in the coming months.
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