Unexpected easing of foreign ownership caps on airlines and retailers by Prime Minister Manmohan Singh has underscored his resolve to win back investor confidence, resulting in shares of companies such as Pantaloon Retail and Kingfisher Airlines rising sharply on Monday.
The big-bang reforms are a clear sign Singh is eager to demonstrate the government’s seriousness in fixing an economy hard hit by the global slowdown and the domestic political gridlock.
On Monday, the Pantaloon Retail stock jumped 19.04 per cent to close at Rs 187.60 on the Bombay Stock Exchange (BSE). Kingfisher shares, which hit a 20 per cent upper circuit, ended at Rs 12.97. Shares of retailers like Provogue, Shoppers Shop and Trent gained four to 13 per cent.
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However, analysts warned against excessive optimism, given India had previously announced major reforms, only to roll those back later. Previously, the government had also struggled with fine-tuning the details behind its big-policy initiatives. “Any roll-back would be disastrous,” said Sudip Bandyopadhyay, chief executive of Destimoney Securities. “Implementation of the reform measures would be the key for markets.”
Foreign supermarkets
On Friday, the government had said it would allow foreign supermarkets to buy up to 51 per cent stakes in local partners, reviving measures it had put on hold in December, owing to strong political opposition. The government’s move, likely to benefit debt-laden companies in India’s $450-billion retail market, comes with stiff provisions, including allowing state governments to make their own decisions on whether to let in foreign supermarket chains.
“FDI (foreign direct investment) is a positive, but it’s not the panacea for the sector,” Macquarie Capital had stated in a note on Friday. “Even well-funded business groups have not been able to grow their retail businesses rapidly. Similarly, despite its global expertise, Wal-Mart hasn’t been profitable in China for the last 12 years,” it added.
Investors bet the reform measures would benefit the Future Group the most. Future Group, the country’s biggest retailer, runs the Big Bazaar chain of hypermarkets and also has a stake in Pantaloon. Future Group has been scouting for a foreign partner to help fund expansion and reduce a debt burden of about Rs 2,000 crore.
Other companies that are likely to benefit are Shoppers Stop, whose hypermarket chain (Hypercity) has been seeking a foreign partner.
Major foreign retailers already have operations in India. Wal-Mart has a cash-and-carry tie-up with Bharti Retail for wholesale stores, while Tata Group-owned Trent has a supply chain agreement with Tesco PLC for its Star Bazaar hypermarkets.
Foreign airlines
The government’s decision to allow foreign carriers to buy stakes of up to 49 per cent in domestic carriers sparked widespread share gains in the sector. Kingfisher, reeling under a debt load of $1.4 billion, has been looking to raise funds. It said the government’s measures would help it “re-engage” with investors. So far, no foreign airline has publicly expressed interest in Kingfisher.
Investors were also upbeat on SpiceJet, betting the budget carrier would attract foreign investment, given its healthy balance sheet and significant market share. SpiceJet shares rose 11.88 per cent to Rs 38.60 on the BSE on Monday. Last week, a SpiceJet spokeswoman had said the company was in initial talks with several Gulf carriers for potential investment.
However, analysts cautioned against expecting a queue of foreign carriers looking to invest in India, despite the aviation sector’s growth potential.
The country’s aviation sector is struggling with a big jet fuel bill, high airport charges and steep competition in fares.
JPMorgan recommended investors to “sell into this rally”. “It is too early to assume foreign airlines will pay a significant premium to invest, given the fundamental headwinds,” the investment bank wrote in a note on Monday.
