Budget eyes $8.6 bn from stake sales in FY11

Budget eyes $8.6 bn from stake sales in FY11

Mumbai: India expects stake sales in state firms to fetch Rs40,000 crore ($8.6 billion) in 2010-11, an estimate analysts believe is achievable if the stock market holds up and government offerings are priced attractively.

The targeted amount was announced by finance minister Pranab Mukherjee on Friday during his Budget presentation for the fiscal year that starts on 1 April.

The government is currently implementing an ambitious plan to offload holdings in 60 state-run firms over the next few years aimed at raising funds for welfare programmes without stretching an already wide fiscal shortfall.

An 81% rise in the country’s stock market in 2009 has encouraged Indian firms to raise a total of about $20 billion through share sales to fund expansion in Asia’s third-largest economy, and analysts estimate the figure could be exceeded this year.

But a market downturn since the start of the year and rich valuations have raised concerns about the success of share sales.

“Whether the government will be able to reach its target is obviously going to be based on how the market does," Robert Prior-Wandesforde, an economist at HSBC in Singapore said.

“We think the Indian market valuations are a bit too high right now but we do expect modest gains, and so the government can maybe get away with that number," he said.

India’s main index is down about 6% in 2010, but trades at 15.5 times forward earnings, higher than benchmarks in other emerging markets such as Russia, Brazil, South Korea and Indonesia that trade at a multiple of about 6 to 13.

China trades at 16.7 times, but its economic growth is expected to outstrip that of India.

India raised about $1.8 billion from stake sales in government firms Oil India and NHPC in 2009, and has offloaded stakes in the country’s top power producer NTPC and power finance firm Rural Electrification Corp for about $2 billion this year.

The government is expected to raise about $3 billion from a sale in state-run miner NMDC in March.

“The government had set a target of Rs25,000 crore for the current fiscal, which it has more than delivered, and so the estimate it has given for the next year is very reasonable," said Sonam Udasi, vice president at BRICS Securities, a Mumbai-based brokerage.

“It could have been more aggressive and given a higher number, but divestment is a sensitive topic and he (Mukherjee) is cautious considering what happened with NTPC," Udasi said.

The NTPC stake sale was just covered on the final day after state-run Life Insurance Corp of India and State Bank of India stepped in to buy the shares in the absence of robust foreign-investor interest.

The stock market downturn and a controversial French auction book-building system were blamed for the poor response.

But the REC sale, which closed on Tuesday, was covered more than three times, helping raise about $760 million and easing concerns that interest in government stake sales was waning.

“Earnings growth has been positive and while valuations are closer to long term averages, we believe that India’s growth potential warrants a valuation premium," Franklin Templeton Asset Management said in a note.

“Our interactions with long-term global investors clearly indicates a growing appetite for India and this along with a large savings pool could provide liquidity support to the market," the firm said.

Stake sales in state-run Steel Authority of India Ltd, Hindustan Copper, Coal India and telecom firm BSNL are expected in 2010-11.

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

Morgan Stanley values the government’s stake in state-run firms at about $450 billion.