A formidable combine

The IBP merger ratio is tilted towards IOC shareholders

The merger ratio between Indian Oil Corporation (IOC) and IBP at 1.25 : 1, is clearly in favour of shareholders of IOC. Based on IBP's FY04 book value of Rs 282.62 and a book value of Rs 197.32 for IOC, the ratio was expected to be 1.43:1 or even higher.

However, with the ratio having been better than anticipated for IOC shareholders, the IOC stock suffered less, falling just one per cent, while IBP dropped 1.6 per cent in the broad market sell off on Wednesday.

Ever since the merger was announced earlier this year, the managements of both companies have been working together in a bid to derive the maximum operational and marketing advantages.

The merger will create a stronger company and result in some short-term benefits such as lower administrative costs and savings on inter-company transaction taxes.

In the longer run, a the combined marketing network could provide it with significant advantages vis-a-vis the emerging competition from private players.

IBP has a strong presence in the east and northern parts of the country and especially on the highways while IOC has a formidable presence across the country.

The new company can save on expansion costs by using each others depots more effectively; within the same area a depot can be used to service a larger number of retail outlets.

IBP, being a pure petroleum product marketing company, had in the September quarter reported a net loss of Rs 89.6 crore due to soaring international prices of oil and the inability to raise retail prices.

However, this pure marketing company is expected to perform better going forward due to improving marketing margins for petrol and diesel. Meanwhile, IOC is also expected to benefit from improved gross refining margins and retail marketing margins.

Bond with the best

The year 2004 will surely turn out to be a record year for foreign borrowings whether through loans or bonds. Cashing in on the attractive cost of money overseas, Indian corporates are making a beeline for the dollar market.

Close on the heels of the State bank of India "" which set the benchmark with an extremely fine rate of Libor plus 73.5 basis points for $400 million - IDBI has now mopped up $250 through bonds , at 123 basis point over Libor.

The difference in the pricing is explained by the fact that while SBI is rated one notch above sovereign by Moody's IDBI's rating is Baa3.

The response according to the management was overwhelming , in the region of $600mn with over 70 applications. This is hardly surprising since the appetite for Asian paper is huge both from investors within the region as also Europe.

In IDBI's case, 90 per cent of the issue was allocated to investors from these two regions. That's because there's a dearth of paper and investors are willing to pick up bonds that may have a slightly higher credit risk.

In fact, spreads have been contracting for some time now and when IDBI did its previous issue earlier this year, it had forked out 185 basis points over Libor.

Despite the strong interest in Indian bonds, the secondary market has remained rather illiquid because there are hardly any sellers.

Indian paper is issued infrequently compared with other paper from other Asian countries such as Korea which make more than one bond issue in a month.

While IDBI's will probably be the last issue of the year, Indian companies should take advantage of the liquidity and diversify their resource base by borrowing in the bond markets.

Not a fun time for equity funds

With the Sensex at a new high, India's market capitalisation has touched $365 billion, and has more than doubled over the past one year.

But equity mutual funds accounted for just around 2 per cent of the total market capitalisation as at the end of November. And equities as a percentage of assets under management with domestic mutual funds, has dropped from 28 per cent in FY 2001 to 21.6 per cent in the current year, thus far, according to a recent study. The percentage had in fact, dropped to just under 17 per cent in FY 03, but is up this year so far.

In November, even as the market was scaling new peaks, domestic equity funds actually saw an outflow of the order of Rs 186 crore, though for the year aggregate inflows have been in the region of Rs 700 crore, mainly thanks to Rs 4000 crore flowing in through new schemes.

That again, is a small amount compared with the Rs 8,200 crore that flowed into equity funds in FY2004. Some money has gone out of mutual funds into initial public offerings, some investors have also decided to directly buy stocks, with the short term capital gains tax now at 10 per cent and the long-term tax rate at zero. Some high net worth individuals have switched over to portfolio management schemes.

Till even a year ago fixed income products were offering savers, reasonably good returns given that inflation was at five per cent.

But now the returns on most fixed income instruments are yielding a negative rate of return. That and the recent rally in the markets might prompt investors to move some of their savings to equities "" or equity funds.

With contributions from Shobhana Subramanian