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Capital Markets Weekly: India sets ambitious privatization program including LIC IPO 

07 February 2020 Brian Lawson

Europe

European equity markets had their busiest day for five years on 3 February, according to Global Capital website:

This highlighted that three block sales were completed on the same day, totaling around USD4.7 billion in value.

  • The three sales were for Worldline, a French payments company, London-listed Wizz Air, and SGS, a Swiss laboratory testing firm.
  • Some EUR1.5 billion was raised by the sale of 23.9 million Worldline shares, 13.1% of the company's share capital. It formed part of an ongoing disposal programme by Atos (a French information technology and consulting firm) which is maintaining a cooperation agreement with Worldline. Atos now retains only 3.8% of the firm, to support outstanding convertible debt due in 2024, and if this were exercised would exit Worldline's equity completely.
  • The Wizz Air sale was conducted by Indigo Partners, a US private equity firm with widespread aviation exposures.
  • The fund sold 12.45 million shares in the European regional airline, raising around GBP500 million.
  • Having been its largest shareholder with 20.6% of its equity, Indigo's holding now falls to 3.4%.
  • After the sale, Wizz Air now complies with EU majority shareholding requirements enabling it to retain access to European markets even if the UK fails to agree new arrangements for the aviation sector during Brexit transition.
  • The SGS sale was for 960,000 shares, 12.7% of the company's share capital.
  • The disposal was by the von Finck family, a long-term prior shareholder, which now retains some 3%.
  • SGS's largest shareholder, GBL, increased its position from 16.7% to 18.9%.
  • The placement, at CHF2425 per share, also enabled SGS to widen its shareholder base and expand its free float, according to the company's statement.
  • These three deals brought European equity sales in 2020 to EUR9.6 billion, indicating a sharp increase in activity despite wider global volatility.

India's privatization plans

In the Budget speech on 1 February, India's Finance Minister Nirmala Sitharaman stated that the government plans to sell its whole stake in IDBI Bank - of 46.5% of the bank's capital - to "private retail and institutional investors through the stock exchange".

Within a sizeable divestment calendar, the government also is planning to sell part of its holdings in Life Insurance Corp. of India, with an initial offering projected for the fiscal year starting on 1 April, according to Tuhin Kanta Pandey, Secretary for Disinvestment, cited by Livemint.

  • The website notes that this will require specific legislative action, to adjust the act which established the entity, passed in 1956. It is currently 100% state-owned.
  • A further constraint is LIC's size: with USD434 billion under management when last reported, it holds more than all Indian mutual funds combined, which implies that its sale will place significant downward pressure on the market, particularly the insurance sector.
  • LIC has a market share of 76.28% of policies and 71% in first-year premiums according to Indian media source Business Insider.
  • According to Business Insider, LIC is likely to be worth a total capitalization of INR8-10 trillion: the IPO is likely to be for less than 10% of the company and to target proceeds of INR700 billion (USD9.8 billion).

India's overall privatization agenda for 2020/21 will be doubled to INR2.1 trillion (USD30 billion). This has led to concerns that the government will fail to meet its overall deficit goals

  • Prior privatization targets have not been met. In the current fiscal year, only one-quarter of the stated target was raised.
  • According to Economic Times of India the 2019-20 financial year deficit is projected at 3.8% of GDP, versus 3.3% previously projected, before falling to 3.5% in fiscal 2021.
  • A return to the previously targeted fiscal deficit of 3.0% of GDP has been deferred from FY 2020-21 until at least FY 2023-24.
  • Total fiscal receipts are slated at INR22.46 trillion, versus expenditure of INR30.42 trillion.

On 3 February, China's CSI 300 Index at one stage fell 9.1% after markets reopened following the Lunar New Year holiday, heavily depressed by the growing economic impact of the novel Coronavirus epidemic. It closed 7.9% down on the day, with over three-quarters of listed firms losing the maximum 10% daily limit. The sharp fall in share valued came despite China's central bank, PBOC, adding CNY1.3 trillion (USD171 billion) in additional liquidity.

Despite the volatile short-term market tone, nine US IPOs are slated this week. Most of these are small-sized but PPD, a drug research group, is planning to raise 60 million shares on NASDAQ at USD24-27 to raise up to USD1.62 billion.

  • The group was taken private in 2011 by two US private equity groups, Carlyle and Hellman& Friedman.
  • In April 2017, its ownership was extended to include a subsidiary of Abu Dhabi Investment Authority and GIC, Singapore's SWF. Both entities already were direct investors in the two US groups.
  • PPD achieved revenues of USD2.98 billion in the first three quarters of 2019, on which it earned USD47.9 million.
  • It provides drug development and other services to pharmaceutical and biotechnology groups, claiming to have served each of the top 50 bio-pharma firms globally during 2018.
  • In its registration statement the company states that proceeds will redeem two outstanding debt issues due in 2022.

Our take

Chinese stock markets unsurprisingly have been volatile, especially when reopening after the Lunar New Year break:

  • This is an inevitable consequence of the economic dislocations being caused by the novel Coronavirus outbreak.
  • China's central bank has acted promptly and strongly to extra provide liquidity and has encouraged bank lenders to be flexible in their treatment of affected firms, which should help to reduce downside risks.
  • Nevertheless, given the obvious domestic impacts in China, and the threat of wider regional economic damage, downside risks remain.
  • We view the revival in European share sales as encouraging, with such resilience suggesting that investors share IHS Markit's perception that the European economy may "turn the corner" in 2020.

India's planned LIC IPO is clearly ambitious, as is its wider privatization schedule. Despite the adverse past precedents, we assess there are grounds for some optimism:

  • India remains one of the fastest growing large economies worldwide.
  • LIC's size makes it obviously attractive to major international investors.
  • So does the growth potential for financial services in India's vast but relatively under-developed market.

Posted 07 February 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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