Analysts upbeat on FY19 divestment plan even as PNB fraud bothers
While PSU banks may have fallen out of favour, an earnings revival could prompt investors to lap up stocks of PSU firms when they come up for sale
Mumbai: Despite the massive fraud at Punjab National Bank (PNB) and the mountain of bad loans, analysts do not see a risk to the government’s Rs80,000 crore divestment plans for fiscal year 2018-19.
While state-run banks may have fallen out of favour, an earnings revival could prompt investors to lap up stocks of state-owned companies when they come up for sale, said analysts.
“I don’t think they will face any hurdle to meet their divestment target. I still believe equities are the best asset class, and there are good public sector undertakings (PSUs) as well,” said Ritesh Jain, chief investment officer at BNP Paribas Mutual Fund.
“While PSU banks may have lost favour, some PSUs in other sectors look promising. With earnings growth likely to rebound, they should be good to go,” added Jain.
“Government has various vehicles—selling SUUTI (Specified Undertaking of the Unit Trust of India) stake, ETF (exchange-traded fund) route, and hence, the options are decent. Also, if reforms program continues going ahead, PSUs should get into better shape,” he said.
In his budget speech on 1 February, finance minister Arun Jaitley said the revamped Department of Investment and Public Asset Management (Dipam) is expected to cross the ambitious Rs72,500 crore disinvestment target for 2017-18 by aiming to garner Rs1 trillion during the current fiscal year, aided by the completion of the acquisition of Hindustan Petroleum Corp. Ltd by Oil and Natural Gas Corp. Ltd for around Rs37,000 crore.
The privatisation process of Air India is on track while the government has approved listing of 14 Central Public Sector Enterprises (CPSEs) and strategic disinvestment of 24 CPSEs, targeting an ambitious Rs80,000 crore from divestments in 2018-19.
Jaitley had also said that Dipam would come up with more exchange-traded fund (ETF) offers, including a debt ETF, after the success of Bharat-22 ETF, which raised Rs14,500 crore in 2017-18.
Although the Sensex is not expected to perform as well in 2018 as it did in 2017, when it rose nearly 28%, market participants said unless there was a steep correction and volatility, divestment plans could proceed smoothly.
The BSE PSU index shed 9.52% year-to-date, while the Sensex was flat. However, CPSE ETF and Bharat 22 ETF have outperformed the BSE PSU index and were down just 1% and 3.65% for the year-to-date.
Of the seven state-run companies that went public over the last two years, barring three insurance listings, all the other state-run IPOs—PNB Housing Finance Ltd, Cochin Shipyard Ltd Housing and Urban Development Corp. Ltd and Mahanagar Gas Ltd—have fared well, and beaten the performance of benchmark Sensex, since their listing to date.
To be sure, the government has failed to meet annual divestment targets in all but four of the last 17 years. However, the success in fiscal year 2017-18 is encouraging for investors.
“If it has to be done, it has to be done,” said Dipen Sheth, head of institutional research at HDFC Securities. “I don’t think government’s appetite to divest will be or should be a function of moderate changes in the market. As long as the market does not reverse its direction sharply, we are good to go.”
According to Sheth, in a mildly bearish market or a time-correcting market like the one we are seeing right now, the government might sell at lower valuations. There are some bad PSUs, but then there are good ones too, he said, citing the examples of NTPC Ltd and Power Grid Corp. of India as the good ones of the lot.
Sheth said that in insurance, recently listed SBI Life Insurance Co. Ltd is his top pick. To be sure, the other two insurance IPOs—The New India Assurance Co. Ltd, and General Insurance Corp. of India—trade 11.09% below and 19.73% below their issue prices.
“This time, we have a government which is not blindly socialist. They are not outright capitalists either. This government is a go-getter one, and has the broader picture correct despite plenty of other shortcomings it may allegedly have,” said Sheth.
A few were of the opinion that it may be too early to predict.
“If market conditions are as healthy in 2018, as they were in 2017, then I think the government had a good chance in meeting their disinvestment target in FY19,” said Saurabh Mukherjea, chief executive of Ambit Capital Pvt. Ltd.
“Whatever be the pros and cons of PSUs, I think the main point would be the state of markets than any other factor,” said Mukherjea. “It is too early to predict how the markets will fare in the fiscal year 2019.”
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