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Budget Analysis – Monetization, Privatization and Disinvestment – Research & Ranking

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Budget 2021 – A fearless FM targets a limitless growth

“The ground of fearlessness is fear. In order to become fearless you have to stand in the middle of fear” – Larry Rosenberg – American Buddhist Teacher

Today, we are going to talk about the Budget.

Budget 2021 marked a landmark shift in thought and attitude of the Indian Government. It was a shift from a conservative, deficit-fearing, voter-focused and populist Budgets that this and previous Governments have traditionally tabled. The recent Budget transitioned towards greater transparency, fearlessness, re-building, growth and muscle flexing. We say muscle flexing since the Honorable Finance Minister did not pay heed to calls by global rating agencies on capping fiscal deficit. Higher or lower sovereign rating, we will push for growth, even if it means relaxing fiscal deficit targets for some time. This was the message that the FM drove through. And that is what we feel will drive growth for “Naya India” in the years to come.

While others were just feeding you with key takeaways and overview of the budget, we put our brains to study the transformative, bold and beautiful moves taken by the government, and coined this budget series titled “You Owe This To Your Next Generation”.

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In a series of articles on Budget 2021 we will cover-

  1. Monetization, Privatization and Disinvestment (MPD)– a drive to privatize PSUs resulting in value unlocking, this will help shore up Government revenues, bridge fiscal deficit and improve efficiency of PSUs. 
  2. Boost to infrastructure activities –This Budget did not limit infrastructure creation to roads, highways, ports and railways but extended the same to clean water, sanitation, education, healthcare and proposed creation of Development Finance Institution to mobilize money for funding projects.  
  3. Reforms Major reforms were initiated in areas of domestic manufacturing (Atma Nirbhar Bharat), insurance (higher FDI limit), One Nation One Ration, tax simplification (reduction in time window for re-opening of assessment, faceless appealing), Dividend Distribution (avoid paying interest on advance tax), fast-tracking case resolution at NCLT, setting up of a “Bad Bank”, scrappage policy for phasing out old vehicles, ease of setting up One Person Companies, single Securities Market Code and many more.  
  4. Some “First time ever” moves by the Government– For the first time, the Government under-promised with an intent to over deliver!! Government Fiscal deficit target was way ahead of street estimates, moderate tax growth targets, an unprecedented increase in capex spends, not heeding credit rating agencies’ warnings on fiscal deficit, preference for growth over fiscal prudence.  
  5. All of this is happening when……Corporate Profit to GDP ratio is at multi-year low, NPA cleaning is in full force, credit growth is at multi-year low, only 5% of domestic savings are in equities, GST collections are at highest levels, interest rates are at multi-year lows, Debt to GDP is lower compared to advance countries and most of our debt is domestic.

These reforms have set the ground for multi-year cycle of growth and expansion. This will no doubt set a virtuous cycle for economy and equity markets. This is the best time to be in India and more an equity investor in India.

Given the explosive growth opportunity that lies ahead of us, you simply cannot overlook it. You certainly owe this to your future generations. Come and be a part of this journey and grow with us.

In the first part, we will focus on the privatization and disinvestment targets that have been laid down.

What is disinvestment?

Simply put, disinvestment is selling or liquidating assets of a State or Central Public Sector enterprise in order to raise money. This money is used by Government for bridging fiscal deficit, funding welfare schemes, Capex or other activities that the Government undertakes. It is also done in order to reduce inefficiencies at PSUs and make them more competitive and business-oriented.

“The Government has no business to be in business”

The Budget 2021 laid great emphasis on these aspects. The key highlights were a large disinvestment target, public listing of insurance behemoth LIC, and privatization of certain PSU banks and monetization of non-productive, unused public assets.

Disinvestment in key PSUs

  • The Government has budgeted disinvestment target of Rs. 1.75tn for FY22 and a revised target of Rs. 320bn for FY21 (versus earlier budgeted Rs. 2.1tn and achieved till date Rs. 195bn).
  • The process got disrupted in FY21 due to the COVID 19 pandemic.
  • Government plans to sell stake in PSUs such as BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, NeelachalIspat Nigam and several others in FY22.

Disinvestment in PSU Banks and insurance company

  • Apart from IDBI Bank, Government plans to privatize two public sector banks and one general insurance company.
  • Smaller banks which have not been merged till date are likely candidates — Bank of India, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank and UCO Bank.
  • If corporates are allowed to enter the banking field, they can look at acquiring majority stakes in these entities. The exercise will also improve professionalism and accountability in PSU banks.

Listing of LIC

  • If the Government is able to successfully bring an IPO of this behemoth, it will achieve a substantial part of the target in one go.
  • The process will improve efficiency of LIC, bring in more transparency in processes and pricing of products.
  • According to Department of Investment and Public Asset Management (DIPAM), the IPO could likely markets post October, 2021.
  • Experts predict valuation of LIC at Rs. 8-10tn, hence even a 10% stake sale will yield Rs. 800bn – Rs. 1tn of divestment proceeds.
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Monetizing non-core assets

  • Asset monetization program for oil and gas pipelines of GAIL, HPCL and IOCL will be launched.
  • States will also be incentivized for divestment of idle assets.
  • REITs and InVITS could be used more aggressively for monetizing idle public infrastructure or land.
  • NHAI operational toll roads, dedicated freight corridor assets, airports, transmission assets, gas pipelines, warehousing assets and sport stadiums could be monetized.

Will they or won’t they?

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Source:  Budget Document

Government’s track record in meeting disinvestment targets has been patchy. Over the past seven years (FY14-FY20), it has surpassed the budgeted figure only twice.

  • A major reason for disinvestments not going through is lack of political will – it is quite un-populist to put employees of a PSU into hands of corporates. The difference in level of professionalism, accountability, ownership and productivity is huge.
  • The current Government is known for taking bold (and sometimes un-populist) decisions – demonetization, GST, CAA, NRC, farm bill being examples. Hence, we do not see political will as an impediment.
  • The strategic sale will require amendments to law to enable M&A transactions of such companies. This is unlikely to be a hindrance.
  • The current market mood is very positive and FII / DII flows have been very encouraging. There is ample global liquidity, looking for good returns. With developed economies hardly providing any returns, money is finding way into Indian equities and leading them higher.
  • DIPAM is working on a new structure whereby incentives for PSU executives will be linked to factors such as
  • Profitability
  • ROE, ROCE
  • Frequency and quantum of dividends
  • Market Capitalization
  • As mentioned earlier, 10% stake in LIC itself will release Rs. 800bn – Rs. 1tn in one go. This will ease pressure on other assets.

Given these factors, we feel that there is a high probability of achieving the set divestment targets. If these targets are achieved, they will help bridge fiscal deficit to an extent, increase confidence of the Government in undertaking more such exercises in future and improve productivity of PSU companies.

Hindustan Zinc – the poster boy of successful disinvestment and privatization in India

Incorporated as a PSU in 1996, Hindustan Zinc Limited (HZL) is an Indian integrated mining and resources producer of zinc, lead, silver and cadmium. The Vajpayee Government, in 2000 sold 26% stake in the company through a strategic sale. Sterlite Industries emerged as the highest bidder and the transaction was completed in 2002. The Government sold 45% stake in the firm for Rs. 7.69bn. As on date, the Government owns 29.45% stake in the company, which is valued at Rs. 312bn. This implies a whopping 62xs returns in 19 years, CAGR of 24%.

HZL’s successful wealth creation

Stake

Valuation (Rs. Bn.)

Year

CAGR

45%

                           7.69

2002

 

100%

                         17.09

 

 

 

 

 

29.54%

                            313

2021

 

100%

                         1,060

24%

Stake

Valuation (Rs. Bn.)

Year

CAGR

45%

                           7.69

2002

 

100%

                         17.09

 

 

 

 

 

29.54%

                            313

2021

 

100%

                         1,060

24%

Stake

Valuation (Rs. Bn.)

Year

CAGR

45%

                           7.69

2002

 

100%

                         17.09

 

 

 

 

 

29.54%

                            313

2021

 

100%

                         1,060

24%

Source: Yahoo Finance, BSE Website

During this period, its Revenue, EBITDA and PAT have grown at 13%, 20% and 28% CAGR respectively.

Particulars

FY2002

FY2020

CAGR

Revenue (Rs. Cr.)

     1,929

      18,561

13%

EBITDA (Rs. Cr.)

        291

       8,847

20%

PAT (Rs. Cr.)

          67

       6,805

28%

Particulars

FY2002

FY2020

CAGR

Revenue (Rs. Cr.)

     1,929

      18,561

13%

EBITDA (Rs. Cr.)

        291

       8,847

20%

PAT (Rs. Cr.)

          67

       6,805

28%

Particulars

FY2002

FY2020

CAGR

Revenue (Rs. Cr.)

     1,929

      18,561

13%

EBITDA (Rs. Cr.)

        291

       8,847

20%

PAT (Rs. Cr.)

          67

       6,805

28%

Currently, HZL is the world’s second largest zinc-lead miner behind Glencore (Swiss firm), and fourth largest zinc-lead smelter globally. It also features in the top 10 list of silver producers in the world.

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So this shows that there is a track record of fantastic turnaround of operations of company post disinvestment. The Government will be wanting to replicate this success in many more PSUs in the times to come.

While aiming for growth, Government has also extended the infrastructure activities to the pressing needs of clean water, sanitation, education, healthcare and proposed creation of Development Finance Institution to mobilize money for funding projects. These beautiful moves evoke a sense of inclusivity.

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