The Indian government will raise at least Rs114 billion ($2.14 billion) from its sale of a 9.5% stake in power producer NTPC after its auction-style sell-down was 1.7 times subscribed — a big number for a deal this size.
Indeed, the offering exceeds the $1.1 billion sale of shares in iron ore miner NDMC in December as the biggest government divestment in the current fiscal year. It is also the largest equity deal in India since the $2.5 billion sell-down in ONGC in March 2012.
The lowest bid to be allocated was Rs145.55, which represents a slight premium to the floor price of Rs145 that was set before the offering kicked off yesterday morning, and a 4.1% discount to NTPC’s closing price of Rs151.80 on the National Stock Exchange on Wednesday.
However, the share price fell while the offer was open for subscriptions yesterday and finished the day 2.5% lower at Rs148.05. Hence, the government sold the shares at a discount of no more than 1.7% versus the latest market price.
As of last night there was no information about the highest bid, but sources estimated that it wouldn’t have been much above the closing price of Rs148.05. The weighted average price of the bids received (also referred to as the indicative price) was slightly above the floor price at Rs145.91.
This was the government’s second asset sale in a week, after it divested a 10% stake in Oil India last Friday.
Earlier this week the government announced on its website that the average selling price for the Oil India shares was Rs523.15 — a 3.7% discount to the previous day’s close. This means it raised a total of Rs31.45 billion ($590 million) from the divestment. The floor price was set at Rs510 and sources had earlier said that the lowest accepted bid was Rs520 per share.
In the same announcement, the government confirmed that foreign institutional investors (FIIs) accounted for 60.4% of the demand for Oil India.
Including the proceeds from the NTPC transaction, the Indian government has now raised about $4 billion from the sale of shares in public sector companies in the current fiscal year — putting it more than two-thirds on the way towards reaching its target of Rs300 billion ($5.6 billion).
The revenues brought in from asset sales are an important part of the government’s attempt to keep the budget deficit at 5.3% of GDP this fiscal year, which ends on March 31. But it had a slow start with no sell-downs at all in the first seven months and many observers are still questioning whether it will be able to meet its divestment target.
However, the sentiment for Indian stocks has improved on the back of a series of economic and financial reforms introduced by the finance ministry during the past five months, allowing the government to pick up the pace of its asset sales.
Since November it has sold stakes in Hindustan Copper, NMDC, Oil India, and now NTPC. And it seems determined to make up as much as possible of the remaining shortfall during the final two months of the year.
On February 1, a finance ministry official told reporters in New Delhi that the government is also looking to sell part of its stakes in National Aluminium Co, Steel Authority of India, Rashtriya Chemicals & Fertilizer, and Metals and Mining Trading Corp before the end of March.
“The government is looking to divest its holdings in three or four more companies, and NTPC, which is the biggest, has a high probability of going through,” K Ramanathan, chief investment officer at ING Investment Management India, said following the Oil India sale. “So, in a worst case scenario, we may be looking at a shortfall of 20%, which is not too big, and in the best case, maybe just 10%.”
The bigger fear, he said, is that the momentum of reforms may slow or that the political opposition to further measures will increase. “We are very happy with the current pace of the reforms and the sense of urgency displayed by the finance minister,” Ramanathan said.
Indranil Pan, chief economist at Kotak Bank, is also not that concerned about a potential shortfall versus the original $5.6 billion target, noting that any remaining gap may be padded up through extra dividends from public sector companies. However, he does stress that the government should use some of the revenues from its divestments to improve the country’s lagging infrastructure.
“What worries me is that the talk of asset sales focuses too much on just filling a gap in the budget,” Pan said. “When you are selling assets in the better companies, you are to some extent foregoing dividends from these companies, so the money raised must be used productively to build alternative assets.”
The government offered to sell approximately 783.26 million shares in NTPC, which will reduce its stake in the power producer to 75% from 84.5%.
Like the Oil India and NDMC sell-downs, the deal was done through a so-called offer for sale with multiple clearing prices. This meant that investors put in bids for how many shares they wanted to buy and at what price, and assuming they are above the cut-off point (the lowest allocated price) they will each pay the price they bid. The highest bids will be allocated first and in full, while lower bids will be honoured in falling order as long as there are shares left.
Analysts in India had been recommending investors to subscribe to the NTPC sell-down on the basis that the company should see an acceleration in earnings growth as it adds new capacity in the next few years. NTPC also has better access to coal to fuel its power plants than its private sector peers.
The stock is currently 21% below the 2012 high of Rs187.90 from February last year, which gives it a price-to-book valuation of about 1.5 times based on the average forecasts for the fiscal year to March 2014. That is in line with the private sector power producers, while many analysts argue that NTPC, because of its stronger market position and balance sheet, deserves to trade at a premium.
According to Bloomberg, 35 analysts have a “buy” recommendation on the stock, compared to just four “sells”. Another 11 analysts are neutral. The average 12-month target price is Rs179.73, which implies 21.4% upside from the current market price.
The NTPC offer for sale was arranged by Citi, Deutsche Bank, Goldman Sachs, Kotak Mahindra, Morgan Stanley and SBICAP Securities.
