Don’t look for the gainers

Much like a fairy godmother in a benevolent mood, the Government has unveiled a flurry of reform measures that were on foreign investors’ wish list.

Thus, you have a diesel price hike, divestment in four public sector companies and more liberal foreign direct investment (FDI) limits in contentious sectors such as multi-brand retail (simply put, supermarkets), aviation and broadcasting, cleared in the blink of an eye.

Friday’s announcements have all the keywords that usually have foreign investors reaching for their wallets — fiscal reform, FDI, multi-brand retail and divestment. Therefore, this could well provide the impetus that the Sensex needs to vault over the 18,500 mark, where it is now tantalisingly poised.

Oil: Temporary fix

But if you are hoping to get down to the brass tacks and bet on individual stocks that are likely to benefit from these ‘reforms’, don’t. As it turns out, there aren’t too many.

Take the diesel price hike and the curbs on supply of subsidised LPG cylinders.

Estimates suggest that this will cut the under-recoveries of oil companies by Rs 20,300 crore. That sounds good, until you know that they still have record under-recoveries of Rs 1,60,000-1,70,000 crore left to grapple with.

If crude oil prices shoot up further or the rupee weakens again, those losses can bloat again, making the oil companies go right back to square one.

In this respect, upstream oil companies such as ONGC and Oil India seem slightly better off than oil marketers such as HPCL, BPCL or Indian Oil. If oil prices should go up, they will at least manage to earn slightly better realisations on their final products. This may partly offset a higher subsidy share payable to oil marketing companies.

Listed oil firms trade at such poor valuations today mainly because their investors have no visibility on their likely profits. The only measure that could have provided this visibility is decontrol of diesel prices or a roadmap to align domestic prices with global levels. But only a one-off price hike has been announced.

Which airline?

Then, there are the proposals on FDI. The announcement on aviation gives the go-ahead for foreign airlines to own up to 49 per cent stake in domestic passenger airlines. Expectation of this has sparked off a rally in all listed airline stocks from the distressed Kingfisher Airlines to Jet Airways and Spicejet. But that seems irrational.

If you were a foreign airline company looking to buy into the India story on air travel, where you would choose to deploy your capital today? Would you sink money in order to revive Kingfisher, with its depleted operations, huge debt burden and high cash burn?

Or would you rather bet on the other listed airlines which stand to gain from the forced consolidation in the sector, by way of less capacity, higher airfares and better load factors? That points to Spicejet or Jet Airways as the only likely choices for these foreign investors. Similarly, hopes that global retailers will rush to sew up deals with Pantaloon, Shopper’s Stop or other cash-strapped players owing to liberalised FDI seem misplaced. Reading through the announcement shows that these new foreign players will have to jump through many hoops to get their India investments off the ground.

Apart from identifying these ‘multi-brand’ companies worthy of investment, they will have to make sure that their outlets are set up only in larger towns and cities, put half of their planned capital into back-end infrastructure, source 30 per cent of their merchandise from small and medium enterprises, and adhere to various State laws on retail trade. The biggest deal-killer, of course, is the requirement that foreign giants obtain permissions from State Governments before they go ahead with their store-opening plans.

In fact, these challenges suggest that these reform measures, while good for their signalling effect, may not fix the fiscal deficit or bring in a flood of FDI anytime soon.

Trigger for flows

Overall however, the markets wanted reforms and ‘reforms’ it has got. Therefore, foreign portfolio investors, who have been willing to allocate money to India amid glum economic news and lacklustre corporate profits may now actually have reason to raise their bets on India.

And as a star fund manager once said — ‘liquidity is fundamentals’. If enough capital floods in, that in itself can power the economy, by leading to a stronger rupee, new investments, and better business and investor confidence.

>aarati.k@thehindu.co.in

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