PSU DIVESTMENT - GROWING APPETITE FOR PSUs

By Ruma Dubey

It was with much aplomb that the new Govt had announced, during the July 2014 Budget, a steep rise in its divestment target.  As against Chidambaram’s target of Rs.36,925 crore from stake sale in PSUs, Jaitley raised the target to Rs.43,425 crore and that too, within a span of eight months.  Jaitley’s total divestment target is much higher – at Rs.58,425 crore, with balance Rs.15,000 crore expected to come from divestment in non-Govt companies.

And looks like the govt is following a set time table and in one jiffy, plans to not only meet but actually exceed the target of over Rs.43,000 crore.  Yesterday, after market closure, the Govt announced a mega plan – divestment of stake in  Coal India (10%), ONGC (5%) and NHPC (11.36%). These will be through Offer for sale (OFS) and based on the current market price of all three, if this does go through, it would actually exceed Rs.43,000 crore.  But before there three, this month is likely to see the 5% stake sale in SAIL and this is expected to fetch the Govt, at current market of over Rs.80/share, around Rs.1600 crore.

This sounds good but the question is pricing. Consistently, to better investor response, PSUs have been priced at a discount and despite that, many of these had to be ‘rescued’ by LIC. In fact LIC was the knight in shining armour for SAIL and NTPC.  Today, when the market opened for trading NPHC quickly moved down to become the top most loser on the BSE, with Coal India and ONGC also in the list, being fourth and fifth top losers.

Agreed that sentiments have improved a lot since the previous OFS attempt in March and there is most certainly an appetite for PSUs as it is believed that under the new Govt  they could emerge winners of big sops.  Yet, the history of the past few years, where divestment means falling share price, continues to haunt.  

Historically, it has been seen that when additional equity/float comes into the market, there is always a correction in the stock price. And it is a set routine – stock price of any PSU especially that with lower float shows a sharp fall ahead of the issue.

But if you are a long term investor, this stake sale and fall in share price should not cause much concern. Almost all PSUs have surged much higher than their indicative prices during the OFS though all declined before, during and after the issue. Indicative price of SAIL was Rs.63.07 and today despite being amongst the top losers is at Rs.79 levels.  One of the biggest losers during previous stake sale was MMTC and its indicative price during the June’13 issue was Rs.60.88 and today it is at Rs.77 levels.  Thus eventually, if the stock is fundamentally sound, with good earnings, it does go up.

More and more PSU OFS will come our way with SEBI’s diktat of 25% minimum public float extended to PSUs too.  This means, we could see a re-rating of most of these listed PSUs though there remains little doubt that pricing, despite the improved sentiments, would most likely continue to be at a discount.

There is no doubt that there is a growing appetite, after a long time, for PSU stocks. The Govt has to get the pricing right or else, it could leave a bitter taste, killing the hunger.  Most of the PSUs are mulch cows, sitting on piles of cash and follow liberal dividend policies.  The working of these PSUs and Govt interference has made them into inefficient white elephants; yet the fact remains that they remain safe bets.