The recent move by the government to have companies maintain their public shareholding at a minimum 25 per cent, while being good in a few ways, could see an oversupply of stocks in the market place. It could even lower share prices for companies.
In fact, with companies expected to fulfil the norm by divesting at least five per cent every year, the markets may see a supply of paper worth Rs 1,50,000 crore in the next few years. Of this, analysts expect issuances worth around Rs 59,000 crore in the next 12 months. This could create a situation of oversupply and investors, therefore, need to reassess their portfolio and arm themselves with a strategy to combat this, say experts.
Of the estimated supply of new equity into the market, public sector undertakings (PSUs) will dominate the show, followed by the Indian private sector and then the multinationals. Here, experts recommend a cautious approach, while taking an investment call.
| LOW ON PUBLIC OWNERSHIP | ||
| Company | Promoter
stake (%) | FPO amt
(Rs cr) * |
| PUBLIC SECTOR | ||
| MMTC | 99.30 | 38,424 |
| NMDC | 90.00 | 17,603 |
| NTPC | 84.50 | 15,952 |
| Hind Copper | 99.60 | 11,335 |
| SAIL | 85.80 | 9,904 |
| PRIVATE SECTOR | ||
| Wipro | 79.50 | 4,569 |
| Rel Power | 84.80 | 3,834 |
| JP Power Ven | 87.70 | 1,966 |
| DLF | 78.60 | 1,911 |
| Mundra Port | 80.20 | 1,540 |
| MULTINATIONALS | ||
| Oracle Fin | 80.50 | 993 |
| Gillette India | 88.70 | 703 |
| Alfa Laval | 88.80 | 351 |
| Fres Kabi | 90.00 | 319 |
| BOC India | 89.50 | 270 |
| *Estimated, based on current market cap; Top companies by market cap wherein public float <25%, according to category
Source: JPMorgan | ||
Broader market pressure
Overall, there is expected to be weakness in the market place as the supply of paper could hamper sentiments. According to a JPMorgan research report: “The change in regulation, coupled with the capital-intensive phase that the Indian economy is in, implies that, over the medium-term, equity issuances as a percentage of outstanding market capitalisation could be three-five per cent.” This is more than the long-term average of issuances, forming two per cent of the market capitalisation.
The five per cent issuances-to-market capitalisation ratio is not seen as a major issue. But the problem is that it comes at a time when risk-aversion is high among overseas players.
The month of May has already seen an outflow of Rs 9,400 crore, and there is pressure on the domestic institutions to support the markets. JPMorgan analysts believe global risk appetite will, however, have to be supportive for absorption of the fresh equity issuances, given India's dependence on external capital.
While there is an expected pressure in the short-term, the move will improve market strength over the long-term. According to Vallabh Bhanshali, chairman of Enam Group: “This will help PSU divestment, as it will be fast-tracked. Higher proceeds from divestments will improve government finances and, in turn, help the reducing fiscal deficit. In the short-term, what may happen is that the primary market will crowd out the secondary market. However, investors should not worry about the impact as, generally, both the markets move in tandem.”
Motilal Oswal, chairman of Motilal Oswal Securities, says: “There is sufficient liquidity and many overseas investors have evinced an interest in picking up shares of Indian PSUs. So, over the long-term, this should be seen as a positive move for investors.”
There could then be a flurry of issuances from various sources. The most likely would be qualified institutional placement (QIP) and follow-on public offers (FPOs). However, the latter option will be rather difficult.
“We have seen most of the FPOs bomb and only some have scraped through. This route will not be successful,” says Prithvi Haldea, chairman of Prime Database, a company that tracks capital market issuances by the corporate sector. Therefore, the extent of dilution would be lesser than expected.
Stock impact
The impact of this notification is expected to be diverse on various stocks. While existing investors are likely to feel the pinch in the form of a decline in share prices, they could use this opportunity to increase their presence in such quality stocks as Wipro, Mahindra Holiday, Sun TV Network and Godrej Properties. And, it would also be pertinent to look at the extent of supply hitting the market.
Analysts expect multinationals to go private and delist from the stock exchanges, rather than dilute their holdings in Indian arms. For this to happen, they may come out with attractive buy-back offers. Should this (delisting) occur, investors will get a good chance to move out at attractive returns.
The problem would exist for the bigger companies who will have to reduce their holdings by a substantial amount. In the present weak global scenario, this would be a daunting task, and push their share prices visibly lower. However, investors are advised to gauge the fundamentals of these companies, before taking a call.
And, as Bhanshali says: “One should not be worried about the short-term impact on valuations, and should see this from a long-term perspective.”
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