Fundamentals February 7, 2013

Nik's Diary

The Indian market opened flat with a negative bias, mirroring SGX Nifty which is trading lower by ~0.2%. Major Asian indices such as Hang Seng, Shanghai and Nikkei are trading in the negative zone losing 0.4%-1%. US markets closed flat on Wednesday as uncertainty about the financial situation in Europe kept traders on the sidelines ahead of monetary policy announcement from the European Central Bank on Thursday. European markets posted a mix performance with CAC 40 and DAX losing 1.4% and 1.1% respectively, while FTSE 100 and Swiss market posting gains of 0.2% and 0.4% respectively. Meanwhile Indian markets closed flat on Wednesday. The markets keenly await the batch of economic data relating to EXIM, IIP and Inflation expected to be released next week.

NTPC Offer for Sale at floor price of Rs.145

The government has set a floor price of R145 per share to sell 9.5% of its holding in NTPC, a discount of 4.79% to the current market price. The offer for sale (OFS) proposes to sell 78.32 crore shares. At the given floor price, the government could raise at least R11,353 crore — the largest OFS from a state-owned entity in the current fiscal — if the issue is fully-subscribed.On BSE, NTPC closed 2.12% or R3.30 lower from the previous close of R152.30. The scrip has dropped nearly 10% in the last three months. Post-issue, the government’s holding in NTPC will fall to 75% from the current 84.50%. In a poll conducted among brokerages and institutions by FE, market experts and analysts recommended subscribing to the issue from a long-term perspective, citing cheaper valuations. Further, likely power sector reforms, the company’s immunity to pricing and coal-linkages with Coal India would set the company in a favourable position, they said. Citigroup Global Markets, Deutsche Equities, Goldman Sachs, Kotak Securities, Morgan Stanley India and SBI Capital Markets are the lead managers to the NTPC auction. Last month, a JPMorgan research report gave a ‘neutral’ rating to NTPC. “We stay neutral ahead of imminent disinvestment of 9.5% stake which has contributed to the stock’s recent under-performance.. At 1.5x P/BV, NTPC looks cheap in a historical context and relative to regional utilities. Assuming the ‘greater good’ (coal price pooling) is inevitable, we see the current price as an attractive entry opportunity,” stated analysts Sumit Kishore and Deepika Mundra in the research note. If the government manages to raise Rs 12,000 crore from the NTPC auction, total divestment proceeds in the current financial year will touch Rs 22,000 crore. The government had set a divestment target of Rs 30,000 crore for FY13, which was revised to Rs 27,000 crore late last month. OFS has become the preferred route for many companies looking at diluting promoter stake. The transaction is completed within market hours in a single day in a transparent manner. It is also one of the permitted route for promoters who want to bring down their holding to comply with the minimum public shareholding norms. Source: Financial Express

Diageo's open offer for United Spirits cleared by SEBI

Moving closer to complete its Rs 11,167 crore takeover of majority stake in United Spirits, global liquor giant Diageo Plc has got market regulator Sebi's clearance for an open offer to acquire 26 per cent stake from public shareholders of the UB group firm.As part of the deal for purchase of 53.4 per cent stake in Vijay Mallya-led UB group's United Spirits Ltd, Diageo has made a Rs 5,441 crore open offer for purchase of 26 per cent stake in the company from non-promoter shareholders. The open offer, which was made about three months ago soon after the deal announcement on November 9, has been now cleared by Sebi (Securities and Exchange Board of India) after numerous clarifications sought by the regulator and the subsequent representations made to it in this regard. The deal is, however, still awaiting a green signal from fair trade regulator CCI (Competition Commission of India), although the concerned parties (Diageo and UB group firms) have submitted certain clarifications sought from them. Sebi issued its final observations on the open offer, which are necessary for the offer and the deal as a whole to go through, on January 31, 2013 and the same have been communicated to Diageo, United Spirits and the merchant banker JM Financial, a senior official said. The regulator was earlier not comfortable with certain provisions of the proposed offer, including those related to preferential allotment of shares, as it feared that the minority shareholders might be at disadvantageous position under the existing terms of the deal. However, some changes have been made to the satisfaction on the regulator as well as the companies to clear the deal. As part of the deal, Diageo would acquire 27.4 per cent stake for Rs 5,725.4 crore through a combination of share purchase from existing promoters and preferential allotment of shares. In addition, it had offered to acquire an additional 26 per cent stake for Rs 5,441.07 crore through an open offer for public shareholders. Any acquisition of 25 per cent or more stake in a listed company triggers a mandatory open offer for purchase of additional 26 per cent stake from the public shareholders and the same needs to be cleared by the market regulator. The proposed open offer for an additional 26 per cent stake in USL entails purchase of about 3.8 crore shares at a price of Rs 1,440 per share, totalling to Rs 5,441 crore, by Relay BV, a wholly-owned subsidiary of Diageo. The open offer was earlier scheduled to start on January 7, but it was postponed in absence of necessary approvals. An acquirer can go ahead with the open offer only after Sebi issues its "observations" on the same. USL, the country's largest spirits company, is part of Vijay Mallya-led UB Group, whose aviation venture Kingfisher Airlines has been going through turbulent times for many months now and its licence is currently suspended United Spirits. Source: Financial Express

Deutsche Bank upgrades India's Jubilant Foodworks to "buy"

Deutsche Bank upgraded its ratings on India's Jubilant Foodworks Ltd to 'buy' from 'hold', saying the recent under performance of shares did not properly factor in the fast food chain operator's ability to sustain 'strong' earnings growth. Deutsche added investors' focus on slowing same store sales growth ignored Jubilant's "huge" opportunity to grow its business, according to a note dated on Wednesday. Source: Financial Express

Goldman Sachs: Indian economy's long-term growth rate potential 7%

Global investment banking major Goldman Sachs believes the long-term potential growth rate of the Indian economy is 7 per cent and this could be notably higher provided the reform process gains momentum. "Although we feel the current long-term potential growth rate of the economy is 7 per cent, this could be notably higher if the reform process were to gain momentum," Goldman Sachs said in a research note. According to the research note, India is expected to clock 6.5 per cent real growth in 2013, which would rise to 7.2 per cent in 2014 and further to 7.5 per cent in 2016. India has been growing at an impressive rate of 9 per cent before the global financial meltdown pulled the growth rate down to 6.7 per cent in 2008-09. Goldman Sachs lauded the recent reforms initiatives and said "the key to unlocking India's potential growth has been, and remains in, the area of reforms." In recent times, the Indian government has unveiled a slew of reforms including FDI relaxation in retail and aviation sectors and partial de-regulation of diesel prices. "To continue the imbalance correction process, and keep attracting foreign capital, the government would do well to increase the efficiency of the economy through deregulation and reform," Goldman Sachs said. Notwithstanding the fact that a wide variety of initiatives are necessary, many of the reforms are likely to generate significant political resistance. "Since India is a largely domestic economy, reform will usually cause friction with existing interests, which tend to resist reform, even though the net effect for the country should be positive," the report said. Goldman Sachs said it continues to be overweight on India as the the domestic economic picture appears to have bottomed and is inflecting upwards. The global economy is also improving, led by a rebound in EM growth and a number of difficult reform measures have been passed, and momentum is positive, it added. According to the report, the challenges that India faces can be categorised into three areas: governance /efficiency, the fiscal and current account deficits, and infrastructure. Regarding the widening current account deficit, Goldman Sachs said India's structural current account deficit, which is necessarily funded by capital account inflows, needs to diminish, or the country will be open to sudden shocks like the balance of payments crisis of 1991. Source: Financial Express