The ongoing disinvestment in public sector companies was supposed to be the coming of age party for the Indian stock markets. But one after another the issues of NTPC, REC and now NMDC have appeared in the equity markets without much fan following. It is like an Aamir Khan starrer that does not excite the audience. It could happen once, but it does not happen thrice in succession. If it does, the obvious reading would be that the star?s appeal is well and truly gone.
That should not be the case with the PSUs. Throughout 2009, this was the only party happening on Dalal Street and so it does seem peculiar that just when the economy is on the mend, the party mood seems to have evaporated. A closer look shows a different picture.
To get the perspective right, take a look at how another blue chip SAIL has fared in the same period. From an average price of Rs 218.23 as on January 27 this year it has climbed to Rs 233.90 as on March 10, a rise of 7.18%. This is more or less the same period when the three issues opened. Within this span of 41 days, SAIL has also touched a low of Rs 203.44 but otherwise it has mostly been an upward climb. For short-term investors, the scrip therefore has delivered an impressive capital gain.
This was no flash in the pan. In the same period, BHEL has risen from Rs 2,343.15 a share to Rs 2,432.45, logging a gain of 3.81%. The lowest it touched was Rs 2,303.30, the same day as SAIL, when all Asian markets were hammered.
These are impressive numbers and show the value creation embedded in the story of good counters. Note I am not using the word public sector in this analysis. To get an idea why, one just needs to observe the fate of the PSU index in the same period. In the past four weeks, the same period we are tracking, the PSU index at the BSE has lost 1.78% of its value. The loss is sharper, when one remembers the 52-week high for the index was recorded on January 19, this year.
This makes it clear that the value of the PSU has been sorted out, by the investors, just as they have done for years to companies from any sector. As the SAIL and BHEL counters show, there is a lot of value investing that could be done in good PSU stocks. Never mind, what has happened to the NTPC, REC and even the NMDC public offers.
It is a tribute to the quality embedded in the value of these stocks that such humungous issues did not make their prices collapse significantly despite the issues taking off amidst globally depressed market conditions. Without going into the question of whether in the current market conditions a 5% discount is adequate for the retail investors to show interest, the stocks will remain good buys, going ahead.
That will, however, not be true of all the PSU stocks which will hit the market almost every month through 2010-11.
There are two value propositions in a PSU stock. The first is the sovereign guarantee against their failure. There are no studies to pinpoint the percentage impact on the stock prices of such guarantee. For instance, of the price difference between L&T and BHEL, what owes itself to the sovereign guarantee? The attraction among the earlier set of retail investors was based on this guarantee. Each of the 49 PSU was, therefore, a blue chip by design.
But that picture may have changed for ever. With more than a hundred PSUs in the market expected before 2011 is over, every one will compete against the other and then against their peer in the private sector for the same investor pie.
Then the other value proposition in these stocks will come to the fore. Namely, the value of good management in each company. It is this difference that will now guide how well each of them will perform in the primary market and going forward in the secondary market too. This is a tall order. Except for some of the power sector companies, most of the PSUs are inefficiently managed. They are sitting on huge cash reserves, (HAL, BSNL, for instance) running a monopoly charter with high inventory costs that are billed to the state or the captive consumers (like PFC which borrows with government guarantee at lower costs but sells at market rates).
Finance minister Pranab Mukherjee was, therefore, more than stating a fact in the budget outlining his plan for disinvestment, when he said listing of the companies will improve their performance. Guarantee will not deliver the capital gains to the share holders; the performance of the company will do so.
So, those who were surprised at the performance of the big three in the primary market were essentially reckoning that just the guarantee will be reason enough for retail investors to flock to the scrip.
But investors are evaluating them just as they do private sector issues. One is inclined to believe that as the year wears out, the homogeneity in the PSU index will be history, with stand-outers and failures riddling the group just as in any other index. Analysts will gauge performance against the sectors where they operate; the retail investors have already begun to do so.
subhomoy.bhattacharjee@expressindia.com