Investors looking to buy stocks of public sector undertakings (PSUs) would have plenty of supply in the current fiscal year even though doubts linger on whether the government would be able to achieve the stiff disinvestment target of
Rs 69,500 crore.
Despite plans to front-load disinvestment in PSUs in FY16, the government has managed so far to sell 5% each in Rural Electrification Corporation and Power Finance Corporation to net about Rs 3,200 crore. Officials blame slow pace of disinvestment on the volatile market in May-July period due to a host of factors from Greece debt crisis to crash of Chinese stock market and domestic concerns such as taxation issues.
The success of government’s offer for sale (auction) of 5% in PFC despite a volatile market on July 27 has boosted the morale of the Department of Disinvestment (DoD), the nodal department for executing government stake sales. The retail investors have also gave a thumbs up to the PFC issue by subscribing their portion (20% of the issue) by 4.5 times.
“We are going in for more disinvestment, you will find out very soon,” disinvestment secretary Aradhana Johri said after the stake sale in PFC.
While the government on an average sold stakes in six PSUs per year in the last five years, it could be 10-12 companies this year to meet the highest ever disinvestment target of Rs 69,500 crore. Of that, Rs 41,000 crore would be raised through divestment of 3-15% stake in PSUs and the CPSE-exchange traded fund (ETF). Another Rs 28,500 crore would be raised through strategic sales, including divestment of residual government stake in some private companies and privatisation of some PSUs.
Unlike in the past, the DoD has prepared a rolling pipeline of about 20 PSUs where preparedness was high. The strategy is to offload stakes in the market whenever there are small windows of opportunity, Johri said. “I am confident that this year we will do more disinvestment than in any year in the past,” she said.
Officials have indicated that the next round of stake sales could happen in robust stocks such as 10% in Indian Oil Corporation and 3% in Bharat Petroleum Corporation. These two stocks were trading close to their 52-week highs thanks to stable crude prices and timely receipt of fuel subsidy boosting finances of the oil retailers. Stake sales in these two oil companies would fetch about Rs 12,200 crore at current prices.
The government also plans to sell stakes in many other PSUs, including ONGC, Oil India, NTPC and Nalco, MMTC and NMDC. There is also a move to include GAIL India in the investment list, with a 3% stake sale. Stake sale in ONGC could be delayed to later part of the year as the stock has been beaten down due to the government’s ad-hoc subsidy sharing policy and decline in commodity prices.
Analysts say the government should continue to divest irrespective of market conditions if a particular stock is doing well.
“Divesting is aimed at greater purposes like improving corporate governance, raising money and increasing retail investor base, hence, the government should keep diluting stake in PSUs,” said Prithvi Haldea, founder of Prime Database, which tracks capital market.
The government is in an advanced stage of preparation for the second tranche of the CPSE-ETF–which invests in a fixed set of 10 PSU stocks—to garner up to R5,000 crore. It used the ETF route for the first time, to garner R3,000 crore, in FY14.
With PSU stocks often being valued on the lower side compared to their private peers, the government has been trying to increase the public participation in these stocks which would lead to improved governance and higher value in the long-run.
The DoD has tied up with institutions like the Employees’ Provident Fund Organisation to be anchor investors in CPSE-ETFs to increase indirect retail participation. Besides, in the second tranche of the CPSE-ETF, the government could float another ETF, which would invest in a new set of PSU stocks. ETFs are less prone to volatility than individual stocks.
The highest amount raised via disinvestment was R24,277 crore, in FY15. Even if the government misses the disinvestment target for FY16 for a sixth year in a row, it could still make a mark by mobilising the highest amount ever through the route.