NTPC, HPCL buyback: Should you sell shares or will these beaten down PSU stocks jump higher?

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November 27, 2020 3:41 PM

PSU stocks are known for their underperformance and some might say for the inability to create value for shareholders.

sensex, niftyHolding a contrarian view, some do believe that the cleap valuations for PSU stock and governments intent could soon act as a catalyst for the next leg-up move for these state-owned firms.

PSUs Hindustan Petroleum Corporation Ltd (HPCL) and NTPC have announced share buyback offers. Stocks of both HPCL and NTPC are down nearly 20% year-to-date, failing to mirror the upward trajectory charted by the benchmark indices. The buyback offers of both the firms would see the government buy back equity shares at a premium to the current markets price. So what should an investor in either of these stocks do? Offer shares in the buyback or hold onto them for further gains?

Underperforming stocks

PSU stocks are known for their underperformance and some might say for the inability to create value for shareholders. “I think investors should participate in the NTPC and HPCL buyback, because one factor is that PSU stocks as a whole have been underperforming a lot and there has been consistent supply coming into the market with the government reducing its stake in PSUs and that might continue,” Jyoti Roy – DVP- Equity Strategist, Angel Broking, told Financial Express Online. 

NTPC’s buyback price is of Rs 115 per share, currently the stock is trading at Rs 95 apiece, translating to a 21% premium. HPCL shares on the other hand are currently trading at Rs 211.7 per share and the buyback offer price is of Rs 250 apice, a premium of 18%. Historically, both NTPC and HPCL shares have underperformed. While the NSE Nifty50 has zoomed 63% in the last five year NTPC shares have fallen 13%. HPCL shares gained 17% during the 5-year period but that was significantly lower than the benchmark’s performance.

NTPC buyback price less than anticipated

“NTPC’s buyback offer price is less than what the street was anticipating so it depends on every investor. If they have bought in at Rs 80-85 per share then definitely they should go in for it,” Binod Modi, Head of Strategy, Reliance Securities, told Financial Express Online. He added that the offer price for NTPC buyback is certainly lower than what was anticipated. While NTPC has taken the tender route for the buyback, HPCL will buy shares back from the open market. 

“The problem with HPCL kind of energy companies is that they are into conventional sources of energy and there is a shift towards renewable energy, so there has been significant de-rating for the entire sector,” Jyoti Roy added. He does say that the stocks could also go up considering their low valuations while adding that it is difficult to estimate when exactly they would rally. 

Time to buy PSU stocks?

Holding a contrarian view, some do believe that the cheap valuations for PSU stock and governments intent could soon act as a catalyst for the next leg-up move for these state-owned firms. “PSUs rarely come for buybacks, this shows that the government is very serious about the future of PSU. I believe this would be the beginning of a good phase for public sector companies,” said Vishal Wagh, Head of Research Bonanza Portfolio. Wagh is of the firm belief that it is a time to find good PSUs and invest with a long-term outlook. “The 10-year downcycle in PSUs is likely to bottom out very soon. We are now seeing buybacks instead of the government selling more of its stake. Hunt for good PSU stocks with a long-term view,” he added.

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