The government wanted to sell 12,000 cr. worth shares of ONGC (42.77 cr. shares at a floor price of Rs. 290) today, and the auction – a special scheme that SEBI allows for promoter entities to offload shares in a market parallel to the stock market – seems to have been rescued by the public insurer, LIC.
Only about 9 cr shares were sold until the end of the auction, which means just 4,000 crores were collected. The rest (nearly 4,000 cr.) was pushed through by LIC just before 5 mins of the end of auction.
ONGC shares ended at Rs. 287 for the day, lower than the floor price of Rs. 290. The auction by itself has been a flop – the LIC rescue is what the government does when things don't go its way; after all, who's to question the public insurer what it will do with its money?
Earlier, State Bank of India (SBI) said it will bid for shares, which doesn't make any sense – SBI has huge problems with capital, with a really low capital adequacy ratio; any money it has will have to be used to shore up its capital base. It really has no business buying equity – if it loses, say, 100 cr. when the price of ONGC falls, that further hurts its capital ratios!
This stake sale comes a few days after a huge number of bids flooded Citibank's stake sale for nearly 10% of HDFC. Perhaps the government thought they'd pull through, but there was one big difference: the price. Citi sold HDFC stake at the 660 levels when it had ended the previous day at 700+. ONGC's floor price was ABOVE market price – very strange for a large stake sale. (That said, HDFC's P/E is like 25 versus ONGC's 10)
But the main issue is: Oil under-recoveries by the likes of HPCL, BPCL and IOC are over 125,000 cr. for this year. Some of this is usually thulped on ONGC; we don't know how much, and it's decided at the whims and fancies of the government. Sure, ONGC is quoting at only 10x the profit of FY12, but if these profits can be eroded by a simple random statement that assigns ONGC the bulk of the refiners' losses, then the uncertainty in earnings makes the share a shaky buy.
The government of course does not want clarity because they need to stuff as much loss to ONGC as possible. They simply cannot subsidize the losses on their own balance sheet, where the fiscal deficit is already at 5.5% of GDP or more. So the profitable public sector oil entities (read; Oil India and ONGC) will have to take big hits through "upstream sharing". If they do reveal how much, no one will buy the ONGC shares. And I suppose because they didn't, not many were interested either. The LIC deal may have saved the day: we'll know soon when the mandatory disclosures come in (LIC already owns 5% of ONGC, they have to disclose further purchases). LIC supposedly rescued the NTPC IPO earlier!
Subsequent auctions are going to be tough. The government needs to relook pricing. It sold NHPC at Rs. 36 – a ridiculously overpriced share – and it sits at Rs. 21 today after more than a year. Too many public sector stake sales are at unreasonable prices, and LIC can't rescue them every single time.
U.S. Secretary of State Hillary Clinton has threatened Pakistan with sanctions if the country continues with plans to build a natural gas pipeline to Iran.
The U.S. is moving to squeeze Iran financially in a bid to force it to drop its nuclear program. But Pakistan has been unwilling to line up behind the U.S., saying it needs Iran, a neighbor, to help it meet a massive energy shortage.
Mrs. Clinton told a U.S. House of Representatives subcommittee Wednesday that sanctions could be triggered if Islamabad presses ahead. As Pakistan's economy already is in dire straits, the sanctions could be "particularly damaging" and "further undermine their economic status," Mrs. Clinton said.
Pakistan's top bureaucrat in the Petroleum and Natural Resources Ministry, Muhammad Ejaz Chaudhry, said the pipeline was crucial for Pakistan's energy security – the longstanding Pakistan position. But he added that Pakistan was "committed not to create any problems." A spokesman for the Foreign Ministry was not immediately available to comment.
The pressure on Pakistan comes as the U.S. is calling on India, China and Turkey to reduce their imports of Iranian crude oil. Mrs. Clinton said earlier this week the U.S. was having "very intense and very blunt" conversations with the three countries on the issue.
The U.S. also has been disrupting financial networks that Tehran relies on to get foreign currency for its oil sales.
The pressure appears to be having some success. The European Union agreed in January to ban Iranian oil imports from July 1. India has stood firm in public, saying it needs Iranian oil. But Indian news reports say the country has quietly been seeking increased oil supplies from Saudi Arabia and Iraq in a bid to wean itself off Iranian supply.
The threat to Pakistan comes amid very poor relations between Islamabad and Washington. The two nations are ostensibly allies in the war against the Taliban. But the U.S. blames Pakistan for continuing to support some elements of the Taliban, a charge Pakistan denies. Military and civilian officials in Pakistan were vexed by the U.S. decision in 2005 to enhance civilian nuclear cooperation with India, while denying a similar deal to them.
Pakistan is building civilian nuclear reactors with China's help but says it needs to do more to ensure its energy security.
Work on the Pakistan-Iran pipeline, which is to link Iran's South Pars gas field with Pakistan's Baluchistan and Sindh provinces, has not yet begun. An earlier plan to extend the pipeline through to India, at a total cost of $7 billion, was dropped after New Delhi pulled out under pressure from the U.S.
The current project is valued at $1.5 billion and is scheduled for completion by 2014, Mr. Chaudhry said. Once operations begin, Iran has committed to supply 750 million cubic feet of gas per day for 25 years.
Pakistan relies on gas for half its energy needs but domestic supplies are declining, forcing the country to rely on imports. The gas shortages have contributed to an energy shortfall which means most parts of the country suffer lengthy blackouts on a daily basis.
Gross domestic product in Asia's third-largest economy grew at an annual 6.4 percent rate in the quarter to end-December, according to the poll of 26 economists. Forecasts ranged from 6.0 to 7.3 percent with a majority of them lying below the consensus.
That would be a significant slowdown from 6.9 percent in the previous quarter and would mark the fourth straight quarter of growth below 8 percent. Only two economists expect growth above the previous reading.
India's economy has been sluggish, with growth slowing to 7.7 percent in the April-June quarter and further to 6.9 percent in July-September.
"The rate-sensitive sectors such as industrials, construction and mining are so badly affected due to tight monetary conditions that the overall growth number is expected to turn weak," said Siddhartha Sanyal of Barclays Capital.
"At the moment the kind of macro headwinds we're facing both on the domestic and external front makes 8 percent growth seem distant."
The story is similar for China, where the economy grew at its weakest pace in 2-1/2 years in the same period, at an 8.9 percent rate, as it struggles with sagging real estate and export growth.
While the low growth rates in Asia's powerhouses are better than the feeble-to-no-growth in developed nations, there is a growing sense of pessimism India and China lack the momentum to support the faltering global economy.
As China faces plunging property investment and dwindling exports to its largest market, Europe, which is ensnared in a debt crisis, India is grappling with slowing factory activity, high inflation and tight monetary conditions.
MANUFACTURING DRAGS
Manufacturing, which accounts for approximately 15 percent of India's GDP, was likely to be the biggest drag even as farming and services provided some support to the economy.
Between October and December last year, year-on-year growth in industrial output roughly halved in comparison to the previous quarter, as capital investment remained weak. Output from India's factories, mines and utilities increased 1.8 percent from a year earlier, the slowest since October.
"Growth in industrial production and investments are not good enough to support the overall GDP number," said Arun Singh, senior economist at Dun & Bradstreet.
The Reserve Bank of India (RBI) hiked interest rates 13 times over two years to fight stubbornly high inflation, but that aggressive policy tightening has reduced investment activity and hurt industrial growth.
The RBI surprised markets last month with an about-turn and cut its cash reserve ratio by 50 basis points to try and infuse liquidity into markets. If the central bank eases policy further, as expected, analysts predict a revival in economic output.
Still, some economists say the outlook for India is brightening, unlike China, where it remains subdued for the first quarter of this year.
Manufacturing activity grew at its fastest pace in eight months during January while services business grew at its fastest pace since July 2011, business surveys showed this month.
"Everything negative that could have happened did happen during the period," said Bhupesh Bameta at Quant Capital. "From here on we will see an improvement."
"We believe one of the most compelling investment opportunities over the next few years is likely to be in companies that serve domestic demand within emerging markets. Our case rests on two underlying and interconnected forces – one economic and the other demographic. As poor countries get richer, they save as much as they can. Savings rates usually rise until countries reach a range of $3,000 to $10,000 per capita GDP. Once in that range, savings rates begin to decline and consumption becomes a larger part of GDP growth as society starts to provide a social safety net. At this level of wealth, per capita consumption of all goods and services rises in a highly non-linear fashion. For example, while Chinese per capita GDP quadrupled from $1,000 to $4,000 during the past decade, auto sales rose from one million vehicles per year to over
17 million. Markets rarely anticipate this kind of non-linear growth. Fifty percent of all emerging markets (by market capitalization) are now in this sweet spot of shifting from savings to
consumption."
Read more in attached newsletter.
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