Commodity floats in disinvestment deluge

Commodity floats in disinvestment deluge

Mumbai: The initial public offering (IPO) of state-owned Coal India Ltd received bids for over 11 times the shares on offer the day bidding closed for institutional investors.

The successful stake sale, which is expected to fetch the government up to Rs15,160 crore, heralds the beginning of an at least Rs40,000 crore disinvestment programme over the next five months.

By design or chance, almost all the companies lined up for disinvestment this fiscal are in the energy and commodity sectors—industries where investors are hungry for a piece of action in the world’s third fastest growing economy (after China and Brazil).

The companies include miners MOIL Ltd, Hindustan Copper Ltd, steel maker Steel Authority of India Ltd, and three energy firms, Indian Oil Corp. Ltd, Power Grid Corp. of India Ltd and Oil and Natural Gas Corp. Ltd.

“The (US) Fed’s focus on maintaining a very accommodative liquidity position for an extended period of time is supportive for the commodities outlook," a 6 October note from Deutsche Bank said.

Emerging market equities and commodities are the only asset classes in which global fund managers are overweight, according to the latest fund manager survey by Bank of America Merrill Lynch.

Even markets such as Brazil and Russia, which are typically considered commodity plays and were underperforming the MSCI emerging markets index over the past year, on fears of weak global demand, have rallied in the past month, generating slightly higher returns than the Sensex.

Over the past month, the Sensex has moved up 5.38%; Brazil’s Bovespa has moved up by 5.93%; and Russia’s Micex has gone up by 6.43%.

That, along with the liquidity being unleashed by another round of quantitative easing from the US, will see continued investor interest in sell-offs by the government, despite the concentration of public offers in two sectors, bankers and analysts said.

The demand-supply gap in the natural resource and energy sectors will only widen with growth, pointed out Sadanand Shetty, equity fund manager at Taurus Asset Management Co. Ltd that manages Rs2,694 crore worth of assets.

The coal shortfall is expected to widen from 65 million tonnes a year in fiscal 2010 to 277 million tonnes in fiscal 2017, according to estimates from the IIFL group.

An 8.5% economic growth in India this year is expected to boost the demand for commodities, and for many products such as coal and steel.

India is among the top consumers in the world, spurring appetite for companies in these sectors.

Commodity and energy firms account for nearly 30% of the 30-stock bellwether equity index, Sensex.

Over the past year, the Bombay Stock Exchange’s metal as well as oil and gas indices have underperformed the Sensex.

However, with the current rise in commodity prices, analysts believe there is a scope for run-up in these stocks.

The fact that many of the firms up for disinvestment have sizeable market shares helps too.

For instance, Coal India has a near monopolistic market share while MOIL has over 50%.

“There is a strong appetite mainly because of a few reasons like good corporate governance (considering a more transparent approach and disclosure norms), scale and size and given that they are the largest companies in their respective sector," said Naresh Kothari, president, Edelweiss Capital Ltd.

Besides, the pricing was fairly done in case of Coal India, he added.

To be sure, pricing and regulatory issues such as profit-sharing with locals in case of mining and delays in environmental clearances remain an area of concern.

One reason for Coal India’s successful placement is the reasonably attractive pricing which led to subscriptions despite regulatory issues.

Recent regulatory developments may actually favour the energy firms, said another analyst.

The move to deregulate fuel prices and thereby lighten the subsidy burden on oil marketing companies sent a positive signal to investors on the intent of the government to allow free pricing, Harendra Kumar, head of institutional equities at Elara Capital Plc said.

The portion kept for institutional buyers in the Coal India IPO was subscribed 22.45 times, according to data from the National Stock Exchange. This means that institutions put in nearly Rs1.5 trillion against a quota of Rs6,390 crore.

Non-institutional investor quota amounting to around Rs2,000 crore was almost fully subscribed.

The retail investors, for whom 35% of the issue is reserved, have not fully subscribed yet. They have one more day to subscribe to the issue.

Harini Subramani and Ashwin Ramarathinam contributed to this story.