The general elections in the month of May and the subsequent rise in the equity markets have built up a lot of optimism in the system and there are serious talks of the initial public offer market reviving.

In this, the government seriously taking on the disinvestment route to ease fiscal pressures looks to be a ?certain? possibility. Fiscal sops and stimuli offered before the elections to provide impetus to a visibly slowing economy have also taken their toll on the government?s books. The fiscal deficit is now estimated at 6% of the GDP for the financial year 2008-09 as against the projection of 2.5%. And this can wreak havoc on a slowing economy, as interest rates could rise, the government could levy more taxes, and also it could stoke, the now dormant, inflation, as more money gets printed.

Hence, the government would definitely have to rework its disinvestment strategy and go in for an even stronger execution. And this time around, with the strong mandate that the Congress has, chances of this going through smoothly have increased dramatically.

And it is not the first time that a government would have to resort to selling its wares. It was under the NDA regime in 1998 and 2004 that the government mobilised around Rs 33,700 crore. This was before the Left parties threw a spanner in the works and derailed the process. Analysts reckon that during the 1998?2004 period, the government garnered, on an average, a sum of Rs 5,600 crore a year.

And, this move helped reduce the fiscal deficit from 6.5% of the GDP in 1998?99 to 4.5% in 2003?04. ?Going by our back-of-the-envelope calculations, if the new government manages to mobilise around Rs 10,000 through lined up public offers and strategic sales in FY10, it can lower fiscal deficit by around 25 basis points,? says an analyst at Religare Hichens Harrisons.

And the government?s predicament could well be an opportunity for the investing community, as several ?gems? could be available for investment. ?The government?s offerings, as compared with private sector public offerings, are not that aggressive and investors stand to gain from these,? says Hiten Ganatra, a Mumbai-based investment advisor.

He points out to the case of Rural Electrification Corporation, which came out with its IPO in February 2008. The issue was slated to raise Rs 1,700 crore and was priced at around Rs 105 per share. The issue got subscribed 1.62 times in a matter of an hour and despite the markets being in trouble over the last one year, the share price has already given investors a 50% return as it now hovers around Rs 150 levels. Even the Power Finance Corporation, which came out with its IPO on early 2007, has maintained its price and remains at Rs 197, quite close to its 52-week high of Rs 205.50 and much above its issue price of Rs 85 per share.

Experts reckon that public sector undertakings have some clear advantages that attract retail and institutional investors. Most of them have established businesses and clear earnings visibility. They are not ?start ups? and hence the risk is much lower in such organisations. Then again, most of the companies also have built up advantages over the years. For example, Rail India Technical and Economic Services (Rites), National Hydro Power Corporation or even UTI Asset Management Company. ?Now, if we really need to sell an issue of UTI Asset Management Company when it hits the market, it will be lapped up instantly,? says an investment banker with a leading global firm.

Then again, there are several already-listed companies that are trading at attractive valuations, some of them lower than their book values, because of the low float available in them. With issuances or strategic sales happening, this float will rise and create a favourable valuation scenario. ?Many of these PSUs have large real estate holdings and other assets that are not correctly valued in the books of accounts due to conservative accounting standards. And these could get unlocked once they are privatised,? he adds. ?Just consider the real estate and the properties that a company like MNTL has in Mumbai and look up their value in the books, there?s a clear mismatch,? he concludes.

Hence, the opportunity is truly out there to be grabbed. ?Keeping some extra cash ready would help,? says Ganatra.

The process

However, not all that glitters is gold. And investors need to understand and sift through the opportunities that would be forthcoming. Analysts reckon that public sector undertakings (PSUs) that were earlier identified for disinvestment and whose plans were shelved would be the first ones to hit the market.

Also, it is pertinent to understand the mechanism of disinvestment. Analysts at Religare Hichens Harrisons would like to classify it into four main categories. They are:

1. Transactions involving the sale of the government?s minority shareholding (either through an offer for sale to the public or an auction to selected investors), subject to the residual equity of the government remaining at least 51%.

2. Sale of all or a part of the government?s residual shareholding in disinvested PSUs either through a public offering or private placement.

3. Sale of a large block of shares in a PSE (including subsidiary of PSUs) along with transfer of management control to a strategic partner. This is termed as a strategic sale. After the strategic sale, the PSU ceases to be a government company.

4. Sale of a block of shares in one PSE to another PSE.

Analysts reckon that improving market conditions, the stake disinvestment would attract a wider audience and higher valuations. There are a plethora of PSEs in which the government can sell off its stake:

Firstly, there would be those PSUs, which have filed for a public issue with Sebi, but are yet to see the light of day on the primary markets. These include Rites, National Hydro Power Corp, Bharat Oman Refineries, UTI Asset Management Company and Oil India.

Then there are about 25 PSEs recommended by the Disinvestment Committee, which can be potential targets of divestment. And thirdly, there are those PSEs, which were slotted but the process was later called off for various reasons.

?In our opinion, if the next government takes the disinvestment route to improve its finances, the companies, which were identified for strategic sale, are likely to be the first to go under the hammer,? say analysts with Religare Hichens Harrisons. They reckon that if the disinvestment in those companies happens, stocks belonging to sectors such as logistics, shipping, engineering and construction, oil and gas, metals and fertilisers would be at an advantage.

Their analysis also funds that the strategic sale candidates are currently trading almost at par or at a discount to other peers within the sector. ?We believe that any stake divestment by the government in these PSUs would drive valuations of these companies and thereby push up the valuation of their respective sectors,? they add.

So, clearly, the opportunity is a strong one. However, there are some caveats that need to be considered before investing in these stocks. ?Not all businesses are strong and almost half of the 24-odd companies recommended by the Disinvestment Committee are not earning profits or have not even reported their accounts,? says the investment banker.

Also, there is a case for a pre-IPO run up in several cases, where the valuation advantage could be lost. In many cases, especially the oil marketing companies, there are strong restrictions and interference by the government that many times takes a toll on the earnings of these companies. Such things should be given extra consideration while making an investment, reckon experts. And then on the corporate governance side, there are several issues that need to be addressed. ?Governance in PSUs is highly questionable, many times driven by political compulsions and this is a big dampener. This is one of the parameters that investors have to look into extremely carefully,? says Ganatra. However, the opportunity to pick up some ratnas or mini-ratnas when they come up for sale is more overpowering than the negatives. Investors should clearly be lining up for some of these gems.