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● FY12 government fiscal deficit target of 4.6% of GDP assumes
Rs400 bn (0.44% of GDP) in disinvestment proceeds. Of this only
Rs11 bn has been achieved in 1H. The large disinvestments, i.e.,
ONGC, SAIL, BHEL, IOC, etc., now seem unlikely. Yet, the
disinvestment target has recently been reiterated.
● We note of late the government has shown a propensity to be
pragmatic in assessing its cash flows; for instance, the additional
subsidy burden on ONGC matched the potential inflows from a
stake sale. Cash rich, government-majority owned PSUs may also
be a source of cash for the government.
● This may be in the form of special dividends (which would also
benefit minority shareholders), or as buyers of government stakes
in other PSUs (which would not). While the latter is possible, it is
not probable, in our view. Of non-financial PSUs with high cash
holdings only Coal India, ONGC, NTPC and BHEL are possible
vehicles for stake acquisition in other PSUs (Figure 1).
● We believe stake transfers across ministries will only be
undertaken under extreme circumstances: a base case deficit of
5.0% therefore seems likely (Figure 2). With potential
disappointment in tax revenues from a slowing economy, the
fiscal deficit may be substantially higher. This would further delay
rate cuts. We continue to believe it is too early to buy rate
sensitives.
Disinvestment target seems distant
The Union budget 2011-2012, set an aggressive target to limit the
fiscal deficit at around 4.5% of GDP. This was aided by a
disinvestment target of Rs400 bn (0.44% of GDP) by offering shares
in companies like ONGC, SAIL, BHEL, IOC and PFC. Of these, so far
the government has been successful in selling stakes only in PFC and
some smaller companies, raising Rs11.6 bn in the process (Figure 2).
FPOs planned for ONGC, BHEL and SAIL have been postponed
repeatedly due to difficult industry and market conditions, and most
recently in the case of ONGC, because of lack of clarity on subsidy
sharing. With six months gone and the markets continuing to be
uncertain, it has put the disinvestment target in doubt.
Possibility of stake sale to cash-rich PSUs
A slowing economy, which may constrain tax revenues, and
persistently high oil prices are putting pressure on the government—
55% of the FY12 fiscal deficit has been incurred in the first four
months itself. To counter speculation that the disinvestment target
may be revised down, the government has recently reiterated it. Given
the uncertainty in markets, a straightforward stake sale seems difficult.
The government might look for ways to raise cash through other
means which by-pass the market. One of the ways, already in the
news, is the possibility of the government increasing the subsidy
burden on ONGC and Oil India after the postponement of the ONGC
FPO. As flagged by CS analyst, Sanjay Mookim, the potential cash
from a stake sale would have been comparable to the cash from
excess subsidy contributed by ONGC.
Figure 2: Impact on fiscal deficit due to low disinvestment proceeds
Item Amount (Rs bn) Comments
Budgeted disinvestment 400 ONGC, SAIL, BHEL, IOC
Disinvestment so far 11.6 PFC
Budgeted fiscal deficit 4,128 4.6% of GDP
Fiscal deficit with current divestment 4,517 5.0% of GDP
Source: Union Budget of India, Credit Suisse estimates.
There are other mechanisms possible, most that involve transfer of
cash from cash-rich PSUs. These could be in the form of a special
dividend, or by selling government stakes in companies to these cashrich
PSUs, i.e., transferring cash from these companies to the
government without benefiting minority shareholders. In Figure 1 we
list non-financial PSUs with (1) large gross cash holdings; and (2)
majority owned by the government.
This might look possible right now, but is not probable, in our view. A
quick run-through suggests that Coal India, ONGC, NTPC and BHEL
might be possible vehicles for this action. Unless the government is in
dire straits, transfer of stakes across ministries would be an
administrative challenge, and would also create problems in the future.
We believe the base case is deficit calculations get revised up by
0.4% of GDP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● FY12 government fiscal deficit target of 4.6% of GDP assumes
Rs400 bn (0.44% of GDP) in disinvestment proceeds. Of this only
Rs11 bn has been achieved in 1H. The large disinvestments, i.e.,
ONGC, SAIL, BHEL, IOC, etc., now seem unlikely. Yet, the
disinvestment target has recently been reiterated.
● We note of late the government has shown a propensity to be
pragmatic in assessing its cash flows; for instance, the additional
subsidy burden on ONGC matched the potential inflows from a
stake sale. Cash rich, government-majority owned PSUs may also
be a source of cash for the government.
● This may be in the form of special dividends (which would also
benefit minority shareholders), or as buyers of government stakes
in other PSUs (which would not). While the latter is possible, it is
not probable, in our view. Of non-financial PSUs with high cash
holdings only Coal India, ONGC, NTPC and BHEL are possible
vehicles for stake acquisition in other PSUs (Figure 1).
● We believe stake transfers across ministries will only be
undertaken under extreme circumstances: a base case deficit of
5.0% therefore seems likely (Figure 2). With potential
disappointment in tax revenues from a slowing economy, the
fiscal deficit may be substantially higher. This would further delay
rate cuts. We continue to believe it is too early to buy rate
sensitives.
Disinvestment target seems distant
The Union budget 2011-2012, set an aggressive target to limit the
fiscal deficit at around 4.5% of GDP. This was aided by a
disinvestment target of Rs400 bn (0.44% of GDP) by offering shares
in companies like ONGC, SAIL, BHEL, IOC and PFC. Of these, so far
the government has been successful in selling stakes only in PFC and
some smaller companies, raising Rs11.6 bn in the process (Figure 2).
FPOs planned for ONGC, BHEL and SAIL have been postponed
repeatedly due to difficult industry and market conditions, and most
recently in the case of ONGC, because of lack of clarity on subsidy
sharing. With six months gone and the markets continuing to be
uncertain, it has put the disinvestment target in doubt.
Possibility of stake sale to cash-rich PSUs
A slowing economy, which may constrain tax revenues, and
persistently high oil prices are putting pressure on the government—
55% of the FY12 fiscal deficit has been incurred in the first four
months itself. To counter speculation that the disinvestment target
may be revised down, the government has recently reiterated it. Given
the uncertainty in markets, a straightforward stake sale seems difficult.
The government might look for ways to raise cash through other
means which by-pass the market. One of the ways, already in the
news, is the possibility of the government increasing the subsidy
burden on ONGC and Oil India after the postponement of the ONGC
FPO. As flagged by CS analyst, Sanjay Mookim, the potential cash
from a stake sale would have been comparable to the cash from
excess subsidy contributed by ONGC.
Figure 2: Impact on fiscal deficit due to low disinvestment proceeds
Item Amount (Rs bn) Comments
Budgeted disinvestment 400 ONGC, SAIL, BHEL, IOC
Disinvestment so far 11.6 PFC
Budgeted fiscal deficit 4,128 4.6% of GDP
Fiscal deficit with current divestment 4,517 5.0% of GDP
Source: Union Budget of India, Credit Suisse estimates.
There are other mechanisms possible, most that involve transfer of
cash from cash-rich PSUs. These could be in the form of a special
dividend, or by selling government stakes in companies to these cashrich
PSUs, i.e., transferring cash from these companies to the
government without benefiting minority shareholders. In Figure 1 we
list non-financial PSUs with (1) large gross cash holdings; and (2)
majority owned by the government.
This might look possible right now, but is not probable, in our view. A
quick run-through suggests that Coal India, ONGC, NTPC and BHEL
might be possible vehicles for this action. Unless the government is in
dire straits, transfer of stakes across ministries would be an
administrative challenge, and would also create problems in the future.
We believe the base case is deficit calculations get revised up by
0.4% of GDP.
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