Will weak markets hamper IPOs of PSUs in 2011?

Feb 1, 2011

In this issue:
» Are we close to opening up the capital account?
» MF industry looking for reversal of Bhave's decisions
» Emerging market cos. are on a buying spree
» Chidambaram makes a confession
» ...and more!!

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2010 was a stellar year for the government as far as its disinvestment plans were concerned. Issues such as Coal India, Power Grid and MOIL among others received a thumping response. As a result, the government has been able to mop up Rs 230 bn so far. One of the reasons for such a keen investor interest was the overall buoyancy in the Indian stock markets. The US and Europe have struggled to recover from the global crisis. Therefore, the lure of stronger returns attracted foreign investors to Indian shores. This enthusiasm spilled over to stock markets and public offers as well. But there was also another key reason why some PSU IPOs did well. And this was that they were reasonably priced as compared to many of the expensive ones of their private counterparts.

Now, we are one month into 2011 and the Indian stock markets have been more down in the dumps than up. To such an extent that the country has figured as one of the worst performers among major markets. And so there are concerns that negative sentiments could derail the government's plans to raise Rs 400 bn this fiscal through share sales in state-owned companies. Among the offers lined up this year were SAIL and ONGC. Having said that, market sentiment is not the only factor to be considered when it comes to making public offers. What matters is the business model of the company, its growth prospects, its quality of management and reasonable valuations. For instance, if one takes the case of ONGC, there is a possibility that its issue could receive an underwhelming response. This is not because of market sentiment. Rather because there is lack of clarity on how the subsidies are decided and the government's unwillingness to free up prices of diesel, LPG and kerosene.

Whether the government decides to delay its plans of making public offers this year on account of weak sentiments remains to be seen. But, whatever issue does hit the market, you as an investor should examine each one in its entirety and not base your decisions on market sentiment.

Do you think weak sentiments in the Indian stock markets will hamper IPOs of PSUs in 2011? Let us know or post comments on our Facebook page.

 Chart of the day
Today's chart of the day shows that India's food inflation is miles ahead of not only its developed peers but also its rival China. As a consequence, India's overall inflation had also been pretty high. There are no such food problems for the developed world. But overall inflation there has been creeping up on account of higher energy prices and abundant quantitative easing.

* May 2010 for India, Dec 2010 for the others
Data Source: The Economist

Volatility in forex inflows has caused considerable anxiety to policymakers in India. The RBI in particular has had to intervene time and again to manage the currency risks. In such a scenario giving green signal to forex inflows into the capital account seems a distant reality. With a current account deficit, India is not ideally positioned to capitalize on forex inflows. A surplus in the current account would have at least made the economy less vulnerable to forex outflows. Thus while India's long term objective of opening up the capital account remains undiluted, in the near term managing capital inflows is a priority. The RBI governor has also made his preference for long term capital inflows amply clear. Thus, India's approach to allowing foreign investments into the economy will be gradual. We believe that such a calibrated approach will indeed facilitate the long term objectives of the economy. Especially, that of achieving higher growth without taking undue risks.

Last week, we talked about how the exit of current SEBI Chief Bhave could possibly mark the end of a retail investor friendly era. Well, the end is likely to come sooner than expected we believe. Barely have the readers digested the news, the mutual fund industry has started making its moves. As per a leading daily, the mutual fund industry is drawing up a plan to make out a case to the new Chairman of SEBI for a review of some of the past decisions. Without a shadow of doubt, the MF industry's biggest bugbear is the zero entry load policy put in place by Bhave. And this is the item that the industry has picked as one of the prime candidates for a possible review.

AMFI, the lobbying arm of the industry is likely to pitch for a differential load option in mutual funds. In other words, investors can choose between a 'load' option and a 'no-load' option. We will spare you the details. But this is something that sounds quite ludicrous to us. A 'no' load fund would mean no commission for the distributors. And there is very little possibility that a distributor would choose this fund over the one with an entry load even though the former is in the best interest of an investor. Looks like it will be back to square one if the new SEBI Chief does indeed give in to the demands. We just hope that better sense prevails.

Emerging market companies are taking their shopping carts global. Flush with cash and confidence, they are on the lookout for M&As across the world. China is the most aggressive player on the prowl, but Indian, Mexican, Russian, Brazilian and South Korean companies are not far behind. These countries want to move beyond their low-cost image. They want to be associated with new technologies, innovation and own big global brands. Tata Motors is now the owner of the iconic brands JLR. Bharti is the 5th largest mobile operator post its Zain acquisition. China's Sinopec is busy buying rich oil fields. In 2010, emerging markets accounted for 33% of the world's US$ 2.4 trillion M&A transactions. A whopping 76% jump over 2009, according to Thomson Reuters.

Well, globalization seems to have taken on a whole new meaning. And a few of the emerging seem to have already emerged. A chief economist at Standard Chartered, Gerard Lyons had something very interesting to say. He says that we have moved from 'Made in China' to now 'Owned by China.' And ten years later, he believes that it might just be 'Paid in Renminbi'. A scary thought indeed!

Here comes another shocking revelation. More shocking because of the person from whom it comes from. The man is P. Chidambaram, India's home minister. He admits that half of the government's budget to build much-needed new roads never reaches its intended target. He calls this the country's "biggest swindle". According to him, infrastructure development money was more vulnerable to corruption and wastage than programmes to help the poor.

The transport ministry, until recently headed by minister Kamal Nath, had set an ambitious goal of building 35,000 km of highways by March 2014 at a rate of 20 km a day. However, not surprisingly, he was compelled to scale down his targets for road-building. Earlier this month, he was replaced by C.P. Joshi, a former rural development minister. Will he be able to work any wonders? We'll wait and see what lies on the road ahead.

The environment ministry has come into the news for all the wrong reasons. They have been blamed for creating roadblocks in India's path by delaying approvals for projects. The RBI has gone ahead and blamed the ministry for the fall in India's FDI (Foreign Direct Investment) inflow as the investors have shied away from sectors like mining due to the rigid environment policies. One of the biggest projects that were held up by the environment ministry was the US$ 12 bn steel mill to be set up by Posco in Orissa. The project has finally received the approval from the environment ministry though with some conditions related to environment conservation. The approval has come in after almost a year of waiting. Will this mean that other projects that have been stuck at the ministry's table would also get approved? Only time will tell. But at least things seem to be moving in the right direction.

In the meanwhile, the Indian markets were trading well below yesterday's closing levels during the post noon trading session. India's benchmark index, the BSE-Sensex was trading lower by about 200 points (down 1.1%) at the time of writing. Selling activity was seen in stocks across sectors with FMCG, realty and auto leading the pack of losers. As for rest of Asia, markets ended on a positive note with Japan and Hong Kong ending higher by 0.4% and 0.2% respectively.

 Today's investing mantra
"A good business is not always a good purchase - although it's a good place to look for one." - Warren Buffett

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8 Responses to "Will weak markets hamper IPOs of PSUs in 2011?"


Mar 10, 2011




Mar 7, 2011

You could be right. However the situation could change over time. Sentiment which is fickle could also change. This could make the situation better for for the Govt. I for one am hoping that your research dept. will work to guide us depositors in this area of investment well in advance so that we can take proper decisions



Feb 24, 2011



Piyush Upendra Singh

Feb 13, 2011

The market, at this juncture, is definitely not poised for a major IPO release. This is primarily due to the fact that the sole purpose of releasing an IPO (i.e. fund raising) will not be meet -- as the market is riding a downswing & the valuation will fetch only nominal value for the so called 'Government Silver'. Having said that: an unusually stretched bear market will be an endurance test for the ailing PSUs.


JS Pandher

Feb 5, 2011

Dear Sir/Madam,
I think people's motivation on account of gains from CIL, Power Grid n MOIL will remain high on forthcoming PSU IPOs.


Parmod Sehgal

Feb 3, 2011

Regarding environment policies of the Govt,I would like to suggest that the Ministry of environment should not ignore the fact that development and growth in the economy is the need which cannot be overlooked as that is the only way forward to provide employment and housing and food to our ever growing population.Global warming and its ill effects no doubt a matter of great concern but so are the concerns of poverty elimination. A balance has to be stuck between the human needs and the environment.Both must go side by side.The environment ministry should enroll and train environment professional who instead of becoming road bocks ,should become environment consultants to the project implementation and should work side by side with the project management teams advising them at every stage of project execution in a manner that the projects are carried out with in the projected time frames.Stopping work for want of environment clearances would take our economy nowhere and hence eradication of poverty and hunger an impossible task.


Anupam Garg

Feb 1, 2011

I don't think chart of the day represents the correct picture coz of the different time period of observation for India & other nations.
Inflation figure was particularly higher during the winter season 4 India. Higher energy price is quite a concern. At such rate, consumer expenditure on non basic commodities would take a hit.


Anupam Garg

Feb 1, 2011

IPO investor sounds like an oxymoron. Most ppl take IPOs as a gamble. If the prices fly high, they sell the IPO on the first day itself. Long term investors must hav done their homework on the upcomin issues.
Public sector IPOs are always lucrative as they have backing of the govt. Negative sentiment in market shld not pull down their performance. With surging prices of oil and steel, both issues shld turn out 2 b successful.
& i strongly believe tht weak sentiment is not going 2 stay for a long time. But still, govt. shld pay attention 2 the timing of issues.
as an investor, i believe tht the upcomin IPOs hav strong fundamentals but i'd look out for valuations...if i find the price band expensive, i may hav 2 giv up & perhaps, purchase thru secondary market

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