India government stake sale plan revives interest

Mumbai: India's reform initiative to divest 10 per cent in profitable state companies has revived interest in the country's stock market, which had appeared to be losing momentum after a surge through most of the year.

A reaffirmation the government will not roll back its stimulus package has also helped boost sentiment.

Shares in blue-chip government-run companies such as MMTC Ltd, the country's leading trading firm, and top iron-ore producer NMDC Ltd were among the big gainers on Friday, a day after the government announced the divestment plans.

The government owns 99.33 per cent of MMTC and 98.38 per cent of NMDC. Other large firms include State Trading Corp, Hindustan Copper and Rashtriya Chemicals & Fertilisers Ltd in which the state owns more than 90 per cent.

Foreigners looking for faster-growing economies have been pouring money into emerging markets like India over the past few months, and the government stake sale plans should vet their appetite especially because the large firms are very profitable.

Index

The BSE-PSU index, which represents 48 state-run companies, jumped 3.9 per cent on Friday after Home Minister P. Chidambaram unveiled the stake sale plan.

Traditionally, government stake sales in India have been priced at a discount to the market rates giving investors an opportunity to be in the riches.

Many of these companies sit on huge free reserves and have usually rewarded the government through a hefty dividend or bonus offering before the sale.

The upbeat mood helped the top-30 Sensex notch its first weekly gain in three weeks, climbing 1.6 per cent to 16,158.28, and more gains should be in store in coming weeks.

The market, which has doubled from its 2009 low in March, had been one of the worst performers in October falling 6.8 per cent as fund managers began taking profits ahead of the close of the year.

However, the decline last month had made the market attractive, Nomura analysts Prabhat Awasthi, Nipun Prem and Sanjay Kadam wrote in a report on Wednesday. "Market valuations have now moved from being fairly valued — in the context of continuing build-up of industrial momentum and an economic growth rate that is among the highest in the world amidst the currently anaemic global economic landscape — into attractive territory," the analysts said.

They said Indiabulls Real Estate, Glenmark Pharmaceuticals and HCL Technologies were some of the stocks that were good buys following the fall. Nomura forecast the Sensex to reach 18,800 buy September next year.

Manishi Raychaudhuri, strategist at BNP Paribas, said investment themes for the coming year would revolve around a pick up in infrastructure spending and resilient urban and rural incomes.

"We feel earnings upgrades in which India still lags other markets and continuing global and domestic liquidity could take the markets higher," he wrote in a report on Thursday. Raychaudhuri forecast the Sensex to rise as high as 21,000 by December 2010, and recommended buying banks, automobile shares and infrastructure-related stocks.

BNP predicted the rupee will appreciate against the dollar, which will benefit the stock market as overseas investors prefer to hold their investments in a currency that's appreciating.

Foreigners have invested $14.2 billion in Indian stocks this year after pulling out over $13 billion in 2008. The total holdings by foreign funds since India allowed them in 1993 now exceed $68 billion.

Trade Minister Anand Sharma said foreign direct investment in the first half of 2009-10 was more than $15 billion and portfolio inflows were almost the same.

"I think we can absorb those foreign investment flows. Obviously we will remain watchful on flows of short-term debt and so on, but a revival of foreign investment flows is very welcome," said Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

Finance Minister Pranab Mukherjee said last week the government would continue with the fiscal stimulus to ensure growth.

"After visible signs of pick-up in industrial growth in the last few months, there are some indications that growth of core industries may have moderated in September. Some uncertainties related to the revival of the global economy also remain. We cannot therefore afford to drop our guard," he said.

The writer is a journalist based in India.