Will The Government Find The Right Valuation For Bank Disinvestments After LIC’s Mess?

Indian government could not find the right valuation while disinvesting its stake in LIC last year. Now with focus to utilise the sharp rally in public-sector banks, they would want to assess the market conditions better this time
Disinvestment allows the government to offload its stake in companies
Disinvestment allows the government to offload its stake in companies

The Centre’s announcement of the sale of its stake in IDBI Bank marked the end of a long-running wait as never before had it included any bank into its privatisation plans, primarily due to their poor performances in the past. However, the government’s plan to disinvest this stake and the smaller ones which will follow has more importance than it meets the eye. Not only will these serve as a template for future bank disinvestments, but also show if the government has discovered the right valuation for the banking sector.

Despite the bids for the proposed IDBI Bank stake sale coming in January this year, it seems unlikely that the bank’s disinvestment will be completed in the current fiscal. The reason for the delay is attributed to the bidders still not cleared by the Reserve Bank of India as “fit and proper”, a necessary formality in the process. The government with LIC (Life Insurance Corporation of India) holds a 94.72 per cent stake in IDBI Bank which will come down to 34 per cent, following the sale. This is expected to lay the platform for the government to proceed with the disinvestment of its stake in other banks which are currently rallying due to better profits.

Since the government’s experience of privatising banks will be limited to only IDBI Bank before these potential disinvestments in the banking space, experts are of view that the need for finding the right valuation will be bigger given the sensitivity of the sector. In the last few years, it has not just failed to meet its disinvestment targets on a regular basis but also was not able to find the correct price for a crucial sale like LIC in the insurance sector. The government last year had sold its 3.5 per cent stake in LIC for Rs 20,516, which is today considered as a bad move due to the poor pricing of the sale. LIC’s stock is currently trading at a heavy discount when compared to its listing price last year. On Wednesday, the stock ended the session at a price of Rs 607 apiece on the bourses, against its issue price of Rs 949 apiece.

Former Finance Secretary Subhash Chandra Garg opines that the government is ruining its disinvestment plans by focusing on getting maximum profit, which is also leading to tepid responses from the investors. “Their approach of maximising profit is killing the disinvestment program. As it can be seen in LIC’s case, the current stock price is one-third less than the price at which they were listed. Rather than focusing on the valuation, they need to increase the competition among investors which will eventually fetch them a better price,” he told Outlook Business.

In Search Of The Right Value

According to data from the Department of Investment and Public Asset Management (DIPAM), the government has managed to raise just Rs 8,000 crore through sale of assets so far in the current fiscal. This puts them in a place where they are set to miss the disinvestment target for the fourth consecutive time, as their target for this year stands at Rs 51,000 crore. The only year in the recent past where they were able to meet the target was 2018-19. However, robust tax collections have put the worries of missing these targets at bay for them.

Apart from the tax revenues, the political repercussions of these disinvestment plans have also led to the government not being fully committed to the targets. Often have been cases where the duration of these sales is stretched unnecessarily due to political reasons, which then allows global uncertainties to dampen the investor sentiment. All this put together further makes it difficult for the government to discover the correct sale price. “Nothing else is expected this year. They will do the ground work and go on with the sales post elections when there is more certainty. While there is always an appetite for these assets, the real question is what will be the price and what will be the valuation,” said Anitha Rangan, Economist at Equirus Group.

The government reportedly is also planning to sell its stake in more than five banks but at a smaller scale. Naturally, the timing of these sales will be decided according to the market conditions. The plan is to take advantage of the turnaround seen in the financials of the PSBs. Market analysts currently see the state-owned banks relatively more attractive than the private sector banks after the Nifty PSU Bank Index yielded 34 per cent last year, compared to just 6.9 per cent by the Nifty Private Bank Index. With these smaller disinvestments, government is expected to have a better chance in discovering the correct valuation for larger deals.

Suman Chowdhury, Chief Economist and Head of Research at Acuite Ratings and Research said closure of any large disinvestment will not be possible this financial year due to political reasons. “Valuation surely will remain a contentious issue for any PSU disinvestment. Currently the market scenario is conducive with a long queue of private sector IPOs and we believe that the markets are likely to remain firm over the next few months with expectation of a reversal of FII flows,” he added.

Upward Trend For PSBs

For larger deals, IDBI Bank currently remains the only case of privatisation among banks by the government. Finance Minister Nirmala Sitharaman in her budget speech in 2021 had announced the privatisation of two other banks but no development has taken place since then. Considering the government’s cautious approach to the banking sector, the valuation becomes even more crucial amid the global uncertainties.

“This time it might be a little easier for the government to divest their stake in PSU Banks rather than difficult. The perception towards PSU stocks is different currently compared to what it was a few months back. LIC was a different case altogether. The timing was also different and a lot of uncertainty was hovering around that point of time. It was losing market share to other private insurance companies and the balance sheet was too complex to understand,” said Mukesh Kochar, National Head of Wealth at AUM Capital.

RBI at the end of last year had shown faith in the progress of the Indian banking system as it believed that the banks are in good shape to handle any global challenge thrown at them. With the US expected to cut interest rates in future, market experts see the upward trend to continue for the public-sector banks, making their valuation easier for the government. 

“On a medium to short-term, the sentiment is positive, which will attract buying interest from the investors. Whenever a global challenge comes, it impacts the entire spectrum. Right now, by and large the focus of the banking sector is on the Fed action in the US, where the economy is showing some signs of softening,” said Kranthi Bathini, Director of Equity Strategy at Wealthmills Securities.

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