Air India deal burnishes India equity appeal as China cracks down on firms

India’s move to privatize flag carrier Air India Ltd. in its first big-ticket sale in almost two decades promises to further boost the appeal of the nation’s booming equity market just when China is intensifying its crackdown on private firms.

The high-profile sale puts investor spotlight on Prime Minister Narendra Modi’s aggressive reform agenda, as it shows that his plans to tap the private sector for the country’s assets are gaining traction. It could also pique interest in a number of state-run firms in which the government intends to divest stake, providing another potential catalyst to a market that’s rallied to successive all-time highs.

“Air India’s sale is a landmark that shows India is the place to be in emerging markets amid reforms and the painful overhaul in China,” said Sumeet Rohra, a fund manager at Smartsun Capital Pte. in Singapore. “What has happened puts India equity landscape for a bright future with more privatizations, more inflows and more stock gains.”

India’s equity markets, including initial public offerings, have drawn global attention and benefited from the ongoing regulatory clampdown in China as Beijing’s moves to tighten its grip on a swathe of sectors from technology to education to achieve President Xi Jinping’s vision of “common prosperity” has spooked global funds. Powered by record-low interest rates, a retail-investing boom and a spate of tech listings, India’s market capitalization has surged 37% this year to $3.46 trillion, according to an index compiled by Bloomberg.

The Air India deal could lift sentiment toward the nation’s state-owned firms as investors have long been skeptical of their performance. Reflecting that, the S&P BSE PSU Index has mostly underperformed the benchmark S&P BSE Sensex since the global financial crisis. The valuation of the PSU index is also about a third of the broader benchmark index, near the lowest on record, according to data compiled by Bloomberg.

Modi’s government plans an IPO for Life Insurance Corp. of India, which is set to be the nation’s biggest listing. It also intends to sell stakes in several companies such as Bharat Petroleum Corp. Other potential divestment candidates include Container Corp., Shipping Corp., Dredging Corp., Steel Authority of India Ltd., Hindustan Copper Ltd. and IDBI Bank Ltd.

The deal is not just a signal for improving regulatory climate for private enterprises in India, but will boost the cheap valuations of state-run companies on expectations of getting private owners sooner rather than later, Rohra said.

The last big-ticket program to sell major Indian companies to private players was in 2002 when Reliance Industries Ltd. bought India Petrochemicals Co., a unit of Vedanta Ltd. purchased a majority stake in Hindustan Zinc Ltd. and Suzuki Motor Corp. gained management control in Maruti Suzuki India Ltd. To see a list of stocks to be impacted by the Air India sale, click here.

“With the possible Air India sale, India will be able to send a signal that it is capable of executing a monetization program,” said Ashish Gumashta, managing director of a Julius Baer unit in India. “Globally, all pension funds are looking for yields and we are offering such assets here.”

Shares of some of the divestment candidates rose on Monday, with Shipping Corp. rising as much as 11%, the biggest intraday gain since March 22, and BPCL gaining as much as 1.3%.

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