REC litmus test for govt stake-sale plan

REC litmus test for govt stake-sale plan

Mumbai: A share sale in India’s Rural Electrification Corp to raise $754.4 million will be a litmus test for an ambitious plan by the government to offload stakes in 60 state-run firms over the next few years.

The sale, which opens on Friday, is set to draw a stronger response from investors than the sale in utility NTPC two weeks ago, after it was priced at a steeper discount.

The REC offer, the second major government issue this year, was priced at Rs203 late on Wednesday, almost 8 percent below its closing price earlier in the day. The NTPC offer was priced at a 5% discount.

“After the NTPC case where there was a lot of hype but the price was costly, the government seems to have learnt from its mistakes," Sonam Udasi, vice president at Brics Securities said.

“This is a fair price, and this is a stock for long-term players who believe India’s infrastructure investment will grow over the next few years," he said.

The stake sales in government-run firms are aimed at raising funds for welfare programmes without stretching an already wide fiscal gap, and analysts estimate these sales could fetch $6.5-$11 billion in the fiscal year starting 1 April.

The government’s hopes for success took a knock when the $1.8 billion stake sale earlier this month in top Indian power producer NTPC met with a muted response and just managed to be covered on the final day, with support from state investors.

Investors blamed a controversial “French auction" book-building process for the weak response to the NTPC sale, a process the government has tweaked for its next sale.

A rise in global risk aversion combined with the inflexibility of the book-building system for the NTPC offer conspired to keep demand low.

Shares in REC had fallen 15% since 25 January, when it announced the date for the share sale, compared with a 2% fall in the main index. On Thursday, the shares were down 3% at Rs213.60 at 0740 GMT.

REC is involved in the financing of power projects in India, and its business is expected to grow as India looks to build more power plants to bridge a crippling energy gap.

“Investors can comfortably invest at Rs203 for gains in the next few quarters," Alex Mathews, head of research at Geojit BNP-Paribas Financial Services, said.

“Market conditions have also slightly improved from when the NTPC sale took place. We expect a much better response for REC," he said.

NTPC’s offer price was about 19 times forward earnings, while the REC price is at about 9 times, Brics’ Udasi said.

REC’s 171.7 million share issue, in which the company will offer 128.8 million shares and the government will sell the rest, would raise about $754.4 million at the floor price of Rs203.

French Auction

The government is using a so-called French auction for building an order book of shares from investors.

Under the system, institutional investors will be allotted shares based on the value of their bid above the base price. Bidders at a higher price will be given priority when shares are allocated. Retail investors, who have been allotted 35% of the offer shares, will bid at the floor price.

H.D. Khunteta, director of finance at REC, told Reuters investors would be allowed to revise their bids lower at any time during the REC book-building process, which was not the case during the NTPC issue.

Several people familiar with the NTPC sale said foreign investors accounted for less than 5% of the bids received, with state-run Life Insurance Corp. of India and State Bank of India stepping in to buy up shares in the absence of broader demand.

Khunteta said he was confident that REC would see robust demand from investors as they had gained from the company’s initial public offering and bond sales.

“Foreign investors like us," he said.

Institutional investors have been allotted half the issue, compared with 35% for retail investors. Non-institutional investors such as wealthy individuals will get 15%.

Kotak Mahindra, Bank of America-Merrill Lynch, ICICI Securities, JM Financial and Royal Bank of Scotland are arrangers of the issue.

The response for the REC sale and the French auction system may determine whether the government follows similar pricing and book-building strategies for other upcoming sales.

A share sale in state-run miner NMDC by the end of March aims to raise $3 billion, while the government is also expected to sell stakes in power producer Satluj Jal Vidyut Nigam, Steel Authority of India Ltd, Hindustan Copper, Coal India and telecoms firm BSNL.

India has about 400 state-run firms, half of them loss-making, manufacturing everything from steel to condoms.