Funds eye Indian state firms as reform hopes build

Sabyasachi Mitra

The recent privatisation of state-owned Indian firms has re-ignited foreign investor interest ahead of the Union Budget, but delivery on repeated promises is the key to sustaining the inflow of funds.

After dragging its feet for months, the government stunned the markets earlier this month by selling its controlling stakes in overseas telephone monopoly, Videsh Sanchar Nigam Ltd and oil retailing firm, IBP Co for about $533 million.

Hopes that the sales signal the government's intention to breathe new life into a stale, decade-old privatisation programme when the Union Budget is presented later this month, spurred a buying frenzy in shares of state-backed telecom and energy firms.

"I think the success of privatisation of VSNL provided the catalyst. The government has finally grasped the need to privatise the assets," Devan Kaloo, investment manager at Singapore-based Aberdeen Asset Management, told Reuters.

Aberdeen has about $400 million of funds under management in India and is overweight on stocks of state-owned firms in telecom and energy sectors.

Shares of Hindustan Petroleum Corp have soared 52.5 per cent in the past month, while Mahanagar Telephone Nigam Ltd jumped 34.2 per cent in the same period -- the top two best performing equities in the 30-share benchmark Bombay Stock Exchange index, Reuters 3000Xtra data showed.

Cheap valuations, massive market shares and growth potential have forced global asset allocators to take another look at the neglected state-owned firms, the product of socialist economic policies which India pursued for 40 years.

India has about 240 state-owned companies, almost half of them loss-making, producing everything from condoms to steel with a collective net worth estimated at $33 billion.

Only China outwits India in terms of massive state participation in manufacturing and services.

The price to earnings ratios -- a key determinant of value for investors -- of most Indian state firms is less than five times, way below the average of their private sector peers and regional counterparts, making them potentially attractive buys.

Shares of state-run telecom giant VSNL trade at a P/E of 3.5 times compared with Singapore Telecommunication Ltd's 26.4, Telekom Malaysia's 23.3 and Philippine Long Distance Telephone Co's 8.8, said a recent Goldman Sachs report.

KEEP THE PROMISES

India plans to unveil details of the sale of Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd in July, three months after the oil and gas sector is deregulated to allow the private sector to run retail gasoline stations.

Investors expect Finance Minister Yashwant Sinha to unlock the government's asset vault and announce the sell-off of more state-owned companies in the Budget on February 28 to improve on a divestment record that is far from satisfactory.

Even after the current sales, India managed to raise just over Rs 50 billion ($1 billion) out of a target of Rs 120 billion for 2001-2002 (April-March).

"We are very encouraged by what's happened at VSNL. It's definitely a positive step. But going forward we take a bit of a wait and see attitude," Didier Devresse, chief investment officer at ING Investment Management Asia in Singapore, told Reuters.

Opposition from parties within Prime Minister Atal Bihari Vajpayee's ruling coalition and powerful labour unions have often forced the government to go back on economic reform promises.

Analysts are also worried that the privatisation programme may lose momentum after the proceeds from recent sell-offs are used to plug the Budget deficit for 2001-2002.

"What is frustrating is that you get these spurts before the Budget," Paul Alapat, regional economist at Nomura International, told Reuters. "It's the lack of follow through that tempers any excitement."

The combined fiscal deficit of the central and state governments is estimated at about 10 per cent of gross domestic product, the highest in emerging Asia.

Economists say proceeds from the privatisation should be used to reduce public debt, a move which could help lower interest rates and spur higher investment.

Reuters

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