Mega share sales: Will the markets correct?

In most past instances when big offers hit the market, broader indices corrected 2-4%

Share-sale offers of public-sector companies like Coal India, Oil and Natural Gas Corp (ONGC), Power Finance Corp (PFC) and Rural Electrification Corp (REC) over the next two months suggest the markets might see some correction in the near term. The government is planning to raise a total of about Rs 42,500 crore (Rs 425 billion) through sale of its stake in these four companies — Rs 24,000 crore (Rs 240 billion) from Coal India, Rs 15,000 crore (Rs 150 billion) from ONGC, Rs 1,900 crore (Rs 19 billion) from PFC and Rs 1,600 crore (Rs 16 billion) from REC. More, even some private companies are looking to raise huge sums through share sales.

In its history so far, Indian capital markets have not seen so many of such large offerings in such a short duration. The markets typically correct a little during mega offers. The biggest offering, of Rs 15,475 crore (Rs 154.75 billion), was Coal India’s initial public offering in October 2010.

At that time, within a fortnight from mid-October, the Nifty had corrected 2.6 per cent. Similar was the case at the time of ONGC’s Rs 12,767-crore (Rs 127.67 billion) offer for sale towards the end of February 2012: The Nifty corrected almost four per cent over a week to the day of the OFS. Likewise, the broader indices corrected almost nine per cent around NTPC’s mega offer (over a fortnight that ended on the offer date).

There have also been some exceptions, though. For instance, during National Mineral Development Corporation’s (NMDC’s) follow-on public offer (FPO) of Rs 9,950 crore (Rs 99.50 billion) in early March 2010, and PowerGrid’s Rs 7,500-crore (Rs 75 billion) FPO in November 2010, the markets had seen gains of three-five per cent.

Now, with the government looking to offload a five per cent stake in ONGC, worth Rs 15,147 crore (Rs 151.47 billion) by Wednesday’s closing price, in 2014-15, this counter could see some selling, say analysts. And so might Coal India’s counter. Notably, the country’s largest lender, State Bank of India (SBI), on Tuesday said its committee of directors had approved a share sale of up to Rs 15,000 crore (Rs 150 billion), likely through public or rights offer, or sale to institutional investors. However, the timing for this has not been decided; the bank management says it is only an enabling move and SBI’s offer will hit the market at an appropriate time.

Importantly, the government is not alone this time. Many private companies are looking to raise funds, too. For instance, Torrent Pharma is planning to raise Rs 3,000 crore (Rs 30 billion) by issuing fresh equity shares through a qualified institutional placement (QIP) or the depository receipts route. HDFC Bank, too, on Wednesday received the Cabinet Committee on Economic Affairs’ (CCEA’s) approval to raise up to Rs 10,000 crore (Rs 100 billion) of funds from foreign investors. Tata Motors has also announced its plans to raise Rs 7,500 crore (Rs 75 billion) through a rights offer.

Though a rights offer is meant for existing shareholders, experts suggest that shareholders, typically, either put in fresh money or liquidate their existing holdings (in the company or shares of other companies) to subscribe to such rights issues.

The exact timing of the private players’ offers is not yet known but any bunching of these, both public and private, could put pressure on the markets in the short term. This is despite the strong foreign institutional investor (FII) and domestic investor flows the market has seen in recent months. The market valuations are not cheap anymore, with price-earnings valuations higher than their long-term average of 16 times, based on 2015-16 estimated earnings of Rs 1,848 for the BSE Sensex. Additionally, domestic earnings have not been exciting, either. In fact, quite a few prominent companies disappointed in the December quarter. And, any pick-up in earnings growth is only expected a couple of quarters down the line.

There are concerns at the global level, too. All of these could lead to a pressure on Indian markets in the near term.