The Damocles sword of public float?
The recent Union Budget FY2019 has in a way set the cat among the pigeons with a proposal to raise the minimum public float from 25% to 35%. Of course, it involves notification of detailed guidelines by capital markets regulator SEBI. While market pundits are stumped by this googly, bets on the street range from likely deferral by a year to a two year implementation period for the transition.
Pending these developments, our analysis assesses the probable impact in terms of three key parameters viz.
i) Companies that would be impacted categorized into MNCs, companies having minority foreign holdings, PSUs & PSBs and domestic private companies; ii) The amount involved in the context of annual FII and DII flows, iii) Possibility of MNC’s opting to delist.
There are around 1660 listed entities (on BSE/NSE) having promoter shareholding of more than 65%. For the purpose of our analysis, we have considered only companies with market capitalization above Rs 500 Cr as on 5thJuly, 2019 which narrows the list to 321 companies having an aggregate market cap of~Rs 40.64 lakh crore(26.4% of the entire BSE M-cap)
1. To comply with the requirement of 35% min public shareholding (as and when notified), the companies may opt for OFS, FPO, Private placement, preferential rights/bonus etc to dilute the promoter’s stake. The method each company finalizes shall depend on future growth/ CapEx plans, current gearing etc. However, our analysis assumes OFS as the preferred route, to retain simplicity. Accordingly, the OFS amount required to reach the threshold of minimum public shareholding of 35% (based on CMP) is Rs 3.79 lakh cr which is ~9.3% of the market cap of these 321 companies.
2. By nature of ownership (Table 1), 46 of these are PSUs/ PSBs accounting for 29.8% of OFS amount, with private sector companies share at 59.3% and MNCs’ at 10.8%. Since PSUs are already a part of GoI’s disinvestment target each year and PSBs may see dilution due to bank recapitalisation plan, our further analysis excludes these and is restricted to 275 companies. Be that as it may, it may be mentioned that certain PSBs’ are likely to see OFS size of over 25% viz. Corporation Bank (28.5%), UCO Bank (28.3%), Indian Overseas Bank (27.5%), Central bank of India (26.2%), Bank of Maharashtra (27.5%), United Bank of India (31.8%).
3. Analysis of OFS size as percentage of M-cap : Of the 275 companies (excluding PSU/ PSB), the OFS as a percentage of M-Cap exceeds 20% in eleven (for instance Reliance Nippon, Hathway Cable), while another 21 are in the 10% to 20% bracket (such as Avenue Supermarts, L&T Tech, HDFC Life etc). Further, just 25 companies account for 48.4% of the likely overall OFS amount, led by TCS (7% of company’s M-cap), Wipro (8.8%), Avenue Supermarts (16.2%), Bandhan Bank (17.3%), HDFC Life (11.1%).
4. Of the 275 companies, 54 have MNC parentage with an aggregate market cap of Rs 4.9 lakh Cr where the OFS size (based on CMP) could be Rs 41,118 cr,i.e., ~8.4% of their market cap with the median OFS percentage (% M-cap) at ~10%. The list includes names like Bosch (5.5% of M-cap), Siemens (10%), ABB India (10%), Whirlpool (10%), Linde India (10%), AstraZeneca (10%), GSK Pharma (10%), BASF (8.3%), BlueDart (10%), GE T&D (10%), Akzo Nobel (9.8%), INEOS Styrolution(10%) etc.
On the issue of MNC parentage, over the past decade or so, many MNCs have shown an inclination to raise the stake by doing creeping acquisitions or buyback (Bosch, Akzo Nobel, International Paper APPM, JTEKT India).On the other hand, a few have delisted successfully (Phillips, Alfa Laval etc.) while others have made unsuccessful delisting offers (Ricoh, BlueDart, Linde etc). Clearly, the degree of success has been influenced by i) evolving regulatory guidelines of Sebi in this regard, ii) MNC parent’s ability to foot a stiff bill and iii) minority shareholder greed.
5. Even with the benefit of hindsight, it is difficult to arrive at a formula for a successful delisting. The premium demanded by minority shareholders could range from a reasonable 20% to 400%+. Assuming a modest 25% premium, the aggregate delisting outlay for the 54 MNC’s works out to Rs 2 lakh cr. (41% of their Mcap). Of these 54 MNC’s, the ultimate Parent is a listed entity in the home country for 43 and the ‘delisting bill’ as a percentage of parent’s M-cap is less than 5% for 36 and above 15% for three. On this count, most of the 43 may be inclined to delist. (Table 2)
6. Can the market absorb such a quantum of OFS, even if spread over 2 years? Over the last 3 years, institutional investments into India (measured as Net FII + Net DII in the secondary market + QIP amount raised + 50% of IPO/ FPO/ OFS amount) has averaged around Rs 1.78 lakh cr with the best year FY2017-18 logging in Rs 2.75 lakh cr. (Table 3).
In this backdrop, our analysis indicates that the estimated OFS amount at Rs 3.79 lakh cr (including Rs 1.13 lakh crore from PSUs; Table 1), even if spread over two years w(i.e. Rs 1.89 lakh crore per annum) would more than soak up the entire annual institutional flows! That is definitely bad tidings for the secondary market. (Table 4)
7. MNC’s could be the saviour? Arguably, in two ways. First, if one assumes that MNC’s are generous enough to announce preferential bonus to minority shareholders, to meet the 35% norm, the residual overhang on the equity market would moderate to Rs 1.68 lakh crore per annum i.e. just about matching the annual average institutional flows highlighted earlier. Second, if all the 54 MNC’s were to delist (at 25% premium to 52-wk high) the inflows into hands of institutional & retail shareholders would be about Rs 1.01 lakh crores per annum, implying a surplus that could be redeployed into the secondary market. Voila, a lot hinges on the MNCs and their delisting decisions.
8. Any larger implications of the shift to 35%? Firstly, the higher free float would increase India’s weightage in MSCI-EM indices albeit the benefit would accrue with a lag post the play out of the OFS pipeline.
Second, the consequent higher MNC float may result in higher index P/E multiples (free float weighted) due to rich multiples commanded by the MNCs.
Third, veterans of the market do recall the damage done to MNC disposition towards India post the strict ownership caps enforced in late ‘70s which took a couple of decades to normalize. Though India’s global economic standing is much much higher today, the global environment is volatile (trade wars, crude, rates etc) and may lead to unintended deeper scrutiny by respective headquarters on larger commitments to India.
9. What should investors do? Post budget, a multitude of factors (mostly taxation related) appear to have spooked the markets. This has been aggravated by industry leading players issuing warnings of slower growth which may be reflected partly in Q1FY20 results and more so in Q2FY20. Consequently, September-October 2019 could be the cusp as things play out. Our view is that the next quarter or two may provide stocks at comfort zone valuations and hence an accumulate high-quality names approach.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company.
We do not individually or collectively hold 1% or more of the securities of the company.
We do not have any other material conflict of interest in the company.
We do not act as a market maker in securities of the company.
We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company.
We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships.
We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.