Govt stake sales weigh on public sector stocks
2 min read 17 Mar 2013, 03:44 PM ISTGovt’s desperation to meet divestment target before financial year ends is a blow to minority shareholders
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The S&P BSE PSU Index, made up of 60 state-controlled companies, has taken a beating in the past two months. While the broader market, measured by the S&P BSE 100 Index, has dropped 4% from its peak in mid-January, the PSU index has fallen by over 12%. What’s more, the index has given up all of the gains since early September, when the reforms as well as the talk of further reforms had led to a rally in Indian stocks. The broader market is still about 13% higher compared with the levels in early September.
As pointed out in this column earlier, investing in state-owned companies is fraught with risks, given the centre’s conflicted objectives. This was evident when the government influenced pricing decisions of Coal India Ltd, which, while beneficial to users of coal, turned out to be detrimental to the minority shareholders of the company.
The latest blow to minority shareholders of some public sector enterprises is the government’s desperation to meet its divestment target before the end of the fiscal. As a result, the government has been willing to sell its stake in these companies at a huge discount to prevailing prices. Shares of National Aluminium Co. Ltd fell by 12% in two trading sessions after the company priced its offer for sale of some of its shares at a sharp discount to the market price.
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According to the head of research of a foreign brokerage, investor interest has been low for the stock, given the current performance of the company as well as the trend in metal prices. The share price of Hindustan Copper Ltd has dropped by over 55% in the past six months, those of NMDC Ltd have fallen by nearly 21%, and Rashtriya Chemicals and Fertilizers Ltd by 17.5%. The government has sold shares in each of these companies during this period.
This is not to suggest that the government should have deferred its decision to sell shares in other companies indefinitely, but it would have certainly helped to wait, given the current state of investor sentiment. Only in the case of MMTC Ltd, the government deferred its decision to sell shares, thanks to a 60% drop in the company’s shares. (But this is a rare case where the traded price doesn’t reflect true value, given a floating stock of less than 1%.)
Within the PSU index, only bank stocks and oil and gas stocks have done relatively well in the past six months. In the case of the former, investors continue to look forward to a rate cut on the back of the government’s reforms and a drop in inflation. For the latter, the reduction in subsidies has helped investor sentiment to some extent.
In sum, however, the experience of PSU investors has been unrewarding in the past six months, and should affect the valuations of these companies.
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