PSU stocks gain as Sensex up 472 pts

Written by Devangi Gandhi | Mumbai | Updated: Nov 29 2011, 07:58am hrs
Stocks of public sector enterprises Coal India and SAIL surged on Monday in a strong market which saw the benchmark Sensex soar 471.7 points to close at 16,167.13. The market did not seem perturbed by reports that the government may ask cash-rich PSUs to consider buyback of shares or cross purchases of shares, to meet its disinvestment target of R40,000 crore for 2011-12.

The CIL stock gained 4.4% to end at R322.2 after the secretary in the coal ministry was quoted as saying that the ministry has received the Cabinet's note for the share buyback. The shares of SAIL, ONGC and Bhel also clocked gains of 4% each, closing at R 85.55, R261.65, and R280.75, respectively.

Edelweiss Securities believes the overhang in PSU stocks could continue even after implementation of the latest plan. The reports says that steps such as strategic cross holdings could be a potential overhang given unrelated diversion of cash and holding company discount on such investments.

Edelweiss observes that some of the steps, if implemented, could be directionally negative for the PSU space.

Stocks most likely to be impacted include Coal India, ONGC, NTPC, SAIL, OIL and BHEL, the report says.

According to a report by Kotak Institutional Equities, from an investors perspective while the purchase of other state-owned entities remains a less-preferred option, a similar exercise undertaken in the late 1990s did not erode shareholder value for the investors.

According to reports, a cabinet note on the buyback of shares by PSUs, has been floated by the department of disinvestment for inter-ministerial consultation and ten public sector units (PSUs) are to be shortlisted.

The government is understood to be considering three options to raise close to R46,000 crore: Strategic cross purchases amongst PSUs, buyback of shares by PSUs and also monetising the assets of Specified Undertaking of the Unit Trust of India (SUUTI).

Clearly cash-rich PSUs will be picked out, especially those that have abundant cash reserves even after factoring in 50% of the amount for capital expenditure; potential candidates include CIL, Oil India , ONGC , NTPC , NMDC and SAIL. The biggest assets in SUUTI include an 11.6% stake in ITC, 8.3% in Larsen and Toubro and a 23.4% stake in Axis Bank.

Although the government had hopes to raise R40,000 crore from disinvestments this year, it has not been able to make much headway given the weak market conditions. So far, it has raised only R1,144 crore from the sale of shares in Power Finance Corporation (PFC).

The FPO (follow-on offer) of ONGC has been postponed several times and the oil major withdrew its application last week. The timeline for the SAIL FPO too has been revised several times; a sale of 5% of the equity in the steel major has been envisaged. Similarly, the FPO of Bhel too has been hanging fire.

The Indian markets have been weak in the wake of sovereign debt troubles in the euro zone and fears of a slowdown in major global economies, including the US.

In 2010-11, the government had raised R22,763 crore through the disinvestments of PSUs which included successful IPOs of coal India & MOIL and FPOs of Power Grid and Shipping corporation of India.