* 203 rupee price at near 8 pct discount to Wed closing
* Analysts say price fair, expect long-term gains
* Investors to be allowed to revise bids lower
* Shares down 3 pct in weak Mumbai market
By Pratish Narayanan
MUMBAI, Feb 18 A share sale in India's Rural
Electrification Corp (RURL.BO) to raise $754.4 million will be
a litmus test for an ambitious plan by the government to
offload stakes in 60 state-run firms over the next few years.
The sale, which opens on Friday, is set to draw a stronger
response from investors than the sale in utility NTPC (NTPC.BO)
two weeks ago, after it was priced at a steeper discount.
The REC offer, the second major government issue this
year, was priced at 203 rupees late on Wednesday, almost 8
percent below its closing price earlier in the day. The NTPC
offer was priced at a 5 percent discount.
"After the NTPC case where there was a lot of hype but the
price was costly, the government seems to have learnt from its
mistakes," Sonam Udasi, vice president at BRICS Securities
"This is a fair price, and this is a stock for long-term
players who believe India's infrastructure investment will grow
over the next few years," he said.
The stake sales in government-run firms are aimed at
raising funds for welfare programmes without stretching an
already wide fiscal gap, and analysts estimate these sales
could fetch $6.5-$11 billion in the fiscal year starting April
The government's hopes for success took a knock when the
$1.8 billion stake sale earlier this month in top Indian power
producer NTPC met with a muted response and just managed to be
covered on the final day, with support from state investors.
Investors blamed a controversial "French auction"
book-building process for the weak response to the NTPC sale, a
process the government has tweaked for its next sale.
A rise in global risk aversion combined with the
inflexibility of the book-building system for the NTPC offer
conspired to keep demand low.
Shares in REC had fallen 15 percent since Jan 25, when it
announced the date for the share sale, compared with a 2
percent fall in the main index .BSESN. On Thursday, the
shares were down 3 percent at 213.60 rupees at 0740 GMT.
REC is involved in the financing of power projects in
India, and its business is expected to grow as India looks to
build more power plants to bridge a crippling energy gap.
"Investors can comfortably invest at 203 rupees for gains
in the next few quarters," Alex Mathews, head of research at
Geojit BNP-Paribas Financial Services, said.
"Market conditions have also slightly improved from when
the NTPC sale took place. We expect a much better response for
REC," he said.
NTPC's offer price was about 19 times forward earnings,
while the REC price is at about 9 times, BRICS' Udasi said.
REC's 171.7 million share issue, in which the company will
offer 128.8 million shares and the government will sell the
rest, would raise about $754.4 million at the floor price of
The government is using a so-called French auction for
building an order book of shares from investors.
Under the system, institutional investors will be allotted
shares based on the value of their bid above the base price.
Bidders at a higher price will be given priority when shares
are allocated. Retail investors, who have been allotted 35
percent of the offer shares, will bid at the floor price.
H.D. Khunteta, director of finance at REC, told Reuters
investors would be allowed to revise their bids lower at any
time during the REC book-building process, which was not the
case during the NTPC issue.
Several people familiar with the NTPC sale said foreign
investors accounted for less than 5 percent of the bids
received, with state-run Life Insurance Corp. of India and
State Bank of India (SBI.BO) stepping in to buy up shares in
the absence of broader demand.
Khunteta said he was confident that REC would see robust
demand from investors as they had gained from the company's
initial public offering and bond sales.
"Foreign investors like us," he said.
Institutional investors have been allotted half the issue,
compared with 35 percent for retail investors.
Non-institutional investors such as wealthy individuals will
get 15 percent.
Kotak Mahindra (KTKM.BO), Bank of America-Merrill Lynch
(BAC.N), ICICI Securities (ICBK.BO), JM Financial (JMSH.BO) and
Royal Bank of Scotland (RBS.L) are arrangers of the issue.
The response for the REC sale and the French auction system
may determine whether the government follows similar pricing
and book-building strategies for other upcoming sales.
A share sale in state-run miner NMDC (NMDC.BO) by the end
of March aims to raise $3 billion, while the government is also
expected to sell stakes in power producer Satluj Jal Vidyut
Nigam, Steel Authority of India Ltd (SAIL.BO), Hindustan Copper
(HCPR.BO), Coal India and telecoms firm BSNL.
India has about 400 state-run firms, half of them
loss-making, manufacturing everything from steel to condoms.
For a list of planned government stake sales in Indian
firms, see [ID:nSGE6170K2] .
(Editing by Surojit Gupta and Muralikumar Anantharaman)