Smart investors book profits in reform-driven rally

Carlyle, Cairn raise over $1 bn by selling stakes, as rising rupee adds to gains

Smart investors, including promoters and private equity (PE) companies, are using the reform-driven rally to exit big investments at handsome profits. The Sensex has gained 1,700 points or nearly 10 per cent since September 5, riding on huge foreign institutional investor flows, about Rs 21,500 crore having come in this way during the period.

This boom in prices has recently allowed a couple of smart investors to exit their stakes. On Friday, the US-based Carlyle Group, a PE firm, raised $841 million by selling its 3.7 per cent stake in India’s top mortgage lender, Housing Develo-pment Finance Corporation.

It sold 57 million HDFC shares at Rs 761.42 each, according to agency reports. The sale price represents a discount of 3.5 per cent to its close yesterday. The counter witnessed heavy volumes. A total of 25 million shares were traded on the Bombay Stock Exchange, while the National Stock Exchange saw 59.7 million shares changing hands. HDFC closed at Rs 749, nearly five per cent below the previous close.

Carlyle had earlier raised about $270 million in February by selling a quarter of its stake in HDFC. With this sale, Carlyle has fully exited HDFC.

This is the second such large transaction of foreigner-selling in the past few days. Last Tuesday, UK’s Cairn Energy Plc said it had sold an eight per cent stake in Cairn India, raising $910 million. The rising rupee value is an icing on the cake of stock market gains for foreign investors. On top of the 10 per cent rise in stock indices, the rupee has rallied from 56-levels to 52-levels against the dollar, meaning more dollars for investors selling their rupee investments.

Deutsche Equity Research in its latest research note said, “The most immediate impact of the ongoing series of confidence-boosting announcements has been on the external accounts and on the Indian rupee, which has appreciated by seven per cent since the first reform announcements.”

It advised investors to add banks and other high-beta plays to their portfolio.“We believe investors looking to play the beta rally should increase exposure in banks, real estate and select infrastructure names, and trim positions in information technology services and pharma (on recent strong performance and expected rupee appreciation).”

This strategy is in contrast to what big investors have been doing over the year.

There have been several deals where foreign investors coming through the foreign direct investment (FDI) route have exited banks and other financial services entities, such as HDFC. In February, Citigroup raised $1.5 billion by selling its holding in HDFC. It had sold 145 million shares at Rs 658 each. YES Bank saw some FDI stake dilutions by Rabobank and HSBC IRIS in April and June, respectively. BT sold six million shares in Tech Mahindra this August.
 

SOME OF THE PROMINENT FDI STAKE SALES IN 2012
Company	Transaction date	Seller	Quantity (mn shares)	Price (Rs)	Value ($m)
Axis Bank	Jun 28, ’12	HSBC IRIS Investments Mauritius Ltd	20	958	348
Cairn India	Jun 29, ’12	Cairn UK Holdings Ltd	33	309	191
	Sep 25, ‘12	Cairn UK Holdings Ltd	153	325	919
HDFC	Feb 24, ‘12	Citigroup Holdings Mauritius Ltd	16	658	192
	Feb 24, ‘12	Citigroup Strategic Holdings Mauritius Ltd	129	658	1,577
Tech Mahindra	Aug 30, ‘12	British Telecommunications Ltd	6	778	81
YES Bank	Apr 26, ‘12	Rabobank International Holdings	12	357	79
	Jun 28, ‘12	HSBC IRIS Investments Mauritius Ltd	17	325	101
Source: Kotak Institutional Equities

Also, Warburg Pincus sold 3.7 per cent in Kotak Mahindra Bank, in March.