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Business News/ Companies / LIC says state companies are undervalued
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LIC says state companies are undervalued

LIC says there will be demand for the $10.4 billion of share sales planned by the govt because state-run companies are cheap

LIC which is already among the biggest shareholders in government-run companies from State Bank of India to NTPC, will increase holdings as part of its plan to add the equivalent of $8.2 billion to stocks this fiscal year. Photo: MintPremium
LIC which is already among the biggest shareholders in government-run companies from State Bank of India to NTPC, will increase holdings as part of its plan to add the equivalent of $8.2 billion to stocks this fiscal year. Photo: Mint

Mumbai: India’s biggest money manager says there will be demand for the record $10.4 billion of share sales planned by the government because state-run companies are cheap.

“Public-sector stocks are undervalued," Surya Kumar Roy, chairman of Life Insurance Corp. (LIC) of India, the state-controlled insurer that oversees about $300 billion of assets, said in an interview in Mumbai. “If the offer price is attractive, we will invest."

LIC, which is already among the biggest shareholders in government-run companies from State Bank of India to NTPC Ltd, will increase holdings as part of its plan to add the equivalent of $8.2 billion to stocks this fiscal year, Roy said. The S&P BSE India PSU Index is valued at a 38% discount to the S&P BSE Sensex, versus the five-year average gap of 31%, according to data compiled by Bloomberg.

Buoyant demand for state-owned stocks would help Prime Minister Narendra Modi’s government meet asset-sale targets after the previous administration missed its goal for at least the last four years. Modi is counting on the divestments to cut India’s budget deficit to a seven-year low, which Standard and Poor’s said in August would help improve credit-rating metrics in the world’s second-most populous nation.

The government earlier this month approved a plan to sell a 5% holding in Oil and Natural Gas Corp. (ONGC), 10% in Coal India Ltd and 11.36% in NHPC Ltd. The transactions may help it garner as much as $7 billion, exceeding the $2.6 billion raised in the year ended March 2014 and the $3.9 billion in the year before that.

‘No emotion’

LIC owns 7.79% of ONGC, 2.12% of Coal India and 2.61% of NHPC, making it the biggest shareholder in the three companies after the government, according to data compiled by Bloomberg.

A decision to buy state assets will be made after “an objective, hard-nosed assessment," Roy said. “There’s no emotion attached to it like ‘We are public-sector undertaking, they are PSU.’"

While foreigners have bought $14.1 billion of local shares this year, the most in Asia, appetite for state assets may wane if the government sacrifices shareholder returns while trying to revive economic growth from near a decade-low, according to Dalton Capital Advisors India.

ONGC’s first-quarter earnings trailed analyst estimates, partly because of higher discounts on crude oil sold to state refiners that market fuels below cost to keep retail prices in check. The government, which owns 68.94% of the explorer, in June delayed a move to raise natural-gas prices by three months.

Policy issues

“Lack of clarity on pricing of natural gas for ONGC, and auction policies for Coal India can unsettle investors," U.R. Bhat, a director at Dalton Capital, a unit of U.K.-based Dalton Strategic Partnership Llp that has $2 billion of assets, said by phone in Mumbai. “There will be less demand for shares if policy issues are not sorted out."

Coal India has been asked to halve sales at auctions this year from 58 million tonnes to boost supplies to power plants, coal and power minister Piyush Goyal told lawmakers last month. These sales, which fetch better prices, contributed 40% to earnings before interest, tax, depreciation and amortization in the year ended March 2013, data compiled by Bloomberg show.

Shares of ONGC, Coal India and NHPC have slid at least 6% since the asset sale plan was announced on 10 September. The BSE PSU Index lost 0.3% at 10:10am on Tuesday.

Foreign ownership

Modi is trying to balance the demands of energy companies to cut subsidies with the need to keep retail price inflation under control. He has made progress on diesel by continuing with gradual price increases that began in January 2013. The revenue loss on diesel, which accounts for 43% of total fuel demand, has fallen to less than 1 US cent per litre from 13.4 a year ago, ministry data show.

Overseas investors have responded by raising holdings in state-run companies to a one-year high. Stakes of global funds including Vanguard Group Inc. and BlackRock Inc. in members of the BSE PSU Index was an average 7.45% at the end of June, exchange data compiled by Bloomberg show.

“The valuation of PSU stocks will begin to look up when the sectoral reforms, which are being pushed, are formalized," Aneesh Srivastava, chief investment officer with IDBI Federal Life Insurance Co. in Mumbai, said by phone on 19 September. “PSUs stand to benefit the most because they are among the largest and most influential" companies in their industries, he said.

‘Great years’

Hindustan Petroleum Corp. has doubled this year, benefiting LIC, the biggest shareholder in the refiner after the government. Bharat Petroleum Corp., in which the insurer owns a 5.12% stake, has soared 93% in the period.

ONGC has rallied 45%, poised for the best annual gain since 2009, amid optimism the company would be the biggest beneficiary if subsidies are removed because it bears a large part of the burden. Each dollar increase in gas costs will lift the explorer’s annual revenue by 40 billion, chairman D.K. Sarraf said on 25 March.

Since he came to power, Modi has raised foreign investment ownership caps in defence and railways, and won $53 billion in loans and investment pledges from China and Japan this month. His ability to attract funds from Asia’s two biggest economies is key to meeting his $1 trillion investment target by 2017 to revive the nation’s manufacturing.

“The focus of Modi’s external relations is not on politics, its on commerce, which will open door for more investments into India," LIC’s Roy said. “Everybody feels that the next five years will be great. Nobody wants to be left out of a Noah’s ark which is sailing well." Bloomberg

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Published: 23 Sep 2014, 02:04 PM IST
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