Aarati Krishnan

Disinvestment target well within reach

Aarati Krishnan | Updated on January 13, 2018 Published on February 19, 2017

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The railway PSUs, public sector insurers and new CPSE ETFs are valuable businesses that can command good value on listing

Sceptics looking to poke holes in the budget numbers know that the disinvestment target is an obvious place to look. This is probably why, with the 2017 Budget setting a record target of ₹72,500 crore, critics have gone to town claiming it is an impossible feat.

But with some determination and planning, the Government can easily prove them wrong this year. All it needs to do is walk the talk on listing the large railway and insurance PSUs, and build on its recent successes with CPSE Exchange Traded Fund and SUUTI (Special Undertaking of UTI).

Railway crown jewels

The Budget has mooted the idea of listing three Indian Railways arms in the stock market — IRCTC, IRFC and IRCON. All three are well-managed, efficient and profitable PSUs that can give their private peers a run for their money.

IRCTC, the internet ticketing backbone of the Railways, runs the largest e-commerce site in India, vends Rail Neer and handles catering and tourism packages. With 60 per cent of railway bookings moving online, IRCTC’s revenue has doubled to ₹1,505 crore and profits have more than trebled to ₹188 crore in just three years. Unlike its private e-commerce cousins, IRCTC is highly profitable. It handles more online transactions in a month than the Nasdaq-listed Makemytrip does in a year.

All this suggests that, as a monopoly, a listed IRCTC can comfortably command valuations higher than the listed Makemytrip.com and Info Edge (Naukri.com, 99acres.com). Today, Makemytrip trades at a market capitalisation of 10 times its revenues and Info Edge at 14 times.

Valuing IRCTC at 15 times its revenues gets us to a market valuation of ₹15,000 crore on listing. That number would have been higher by a third, had the finance minister not made the ill-advised move of waiving IRCTC’s service charges this year. Service charges brought in about ₹500 crore of its FY16 revenue.

IRFC’s mandate is to source low-cost money to bankroll the expansion spree of Indian Railways. Despite its borrowing targets galloping fivefold in ten years, IRFC has met them easily and at competitive costs. In FY16, its loan book was ₹85,000 crore and book value ₹9,525 crore. Even a modest asking price of 1.2 times the book value would mean a market value of ₹11,430 crore for an IRFC IPO.

IRCON, the infrastructure and engineering arm of the Railways, also actively participates in projects overseas. In FY16, it had ₹2,703-crore revenues and boasted an order book of ₹17,000 crore. Unlike its private peers, IRCON relies very little on borrowings and earned a respectable net profit of ₹379 crore. A price-earnings multiple of 20 times would lead to a market value of about ₹7600 crore on listing.

Overall, the Railways’ crown jewels mentioned command a combined market value of ₹34,010 crore. A 49 per cent stake sale via IPOs by the Centre would fetch a neat ₹17,000 crore. And this is going by their current numbers, without making any fancy growth forecasts.

Insurance giants

The Cabinet has recently cleared the listing of the five PSU general insurance firms — National Insurance, New India Assurance, Oriental Insurance, United India Insurance, and General Insurance Corporation. Market valuations for general insurers in India have been hotting up of late, with a spate of deals involving private players. Just last year, ICICI Lombard with annual business (gross premiums) of ₹8,300 crore, was snapped up at a valuation of ₹17,200 crore by Fairfax Holdings.

In FY16, the five PSU general insurers raked in total premium of ₹66,152 crore and boasted a networth of over ₹37,000 crore. This suggests a ballpark valuation of about ₹1.3 lakh crore for them in the market. A 25 per cent stake sale could net the Centre over ₹30,000 crore.

Yes, some of these insurers have low solvency ratios and all of them struggle with underwriting losses. But these are exactly the problems that listing can fix. With listing, these firms can tap the markets for capital and need not look to the cash-strapped Government. Underwriting losses are the result of populist pricing. Less government interference can help these firms run their operations on purely commercial lines.

Easy ETFs

After toying with various ineffectual ways to sell minority stakes in listed PSUs over the years, the Centre has hit upon a winning idea lately — the CPSE ETF.

The CPSE ETF bundles government holdings in different PSUs into a single mutual fund, and then invites the public to participate. The sale is a one-shot affair, timed to favourable market conditions.

The latest tranche of CPSE ETF (made up mainly of energy companies) was a runaway hit, with retail investors raising over ₹13,000 crore. But that is just a small fraction of the ₹8 lakh crore worth of stock that the Government still holds in the listed PSUs. Even offloading 5 per cent of this can bolster the disinvestment kitty by ₹40,600 crore. If the Centre can hire some smart merchant bankers to repackage shares in the 40-odd listed PSUs into well-diversified ETFs, retail investors will be more than willing to take a bite.

Selling SUUTI

The SUUTI — created when India’s largest mutual fund was bailed out by the Government in 2003 — sits on a veritable treasure chest of shares in private firms. Winding down SUUTI and selling these shares in the market is the easiest way for the Centre to meet its disinvestment target; but it has been bogged down by red tape.

Recently, the Centre decided to take the bull by the horns. It offloaded a 2 per cent stake in ITC in the market for ₹6,700 crore, without any prior announcement. Though the buyer is believed to be the faithful LIC, this modus operandi is worth repeating.

Announcing a big stock sale to the market before it happens is a sure-fire way of beating down the share price. But now that a precedent has been set, the Centre must quickly and quietly get rid of its remaining 12 per cent stake in Axis Bank, 6.6 per cent holding in L&T, and 9 per cent in ITC. It will get to pocket hefty proceeds of ₹55,000 crore at current prices.

If it sticks to the suggested script, the Modi government could make those disinvestment sceptics eat their words well before the next Budget.

Published on February 19, 2017
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