Disinvestment breather for public sector unit stocks may be short-lived

Low valuations and high dividend yield did not quite prove to be the mantra to generate returns for investors in stocks of state-run companies. On the contrary, public sector unit stocks have been facing rough weather. The Nifty PSE index has lost 15.6% in the last two months. During that time, the Nifty 500 index fell about 9.6%. PSE is public sector enterprise.

In that backdrop, the rebound in these shares on Thursday is a welcome development. A news report that the government is reviewing divestment through the exchange-traded fund (ETF) route provided the much-needed breather for public sector unit stocks. The Nifty PSE index gained 3.1% on Thursday. Some of the gainers in the index were the stocks of Coal India Ltd (7.3%), Oil and Natural Gas Corp. Ltd (5.3%), and Bharat Petroleum Corp. Ltd (4.5%).

These stocks have been hammered ever since the budget announcement that the government plans to raise more than ₹1 trillion through divestments—one of its largest divestment programmes. In fact, in the last four fiscal years, the government divested stocks worth about ₹78,000 crore through several divestments in both the CPSE ETF and the Bharat 22 ETF.

As divestments go, the free-float of stocks increased. Divestments tend to cause a spike in free-floats. Both institutional and retail investors lap up the offerings made through the ETF route because of arbitrage opportunities. As public sector unit divestments have often been made at a small discount to prevailing market prices, they generate considerable interest from investors. The retained oversubscription in such cases then eventually finds its way into the equity market.

Public shareholding in Coal India increased from 21.6% in June 2018 to 29.04% in the same month of 2019. The public float of Indian Oil Corp. Ltd’s stock increased from 43.25% to 47.82% in the same period.

“PSU stocks’ free-floats have increased appreciably in the past few years as investors used to invest in ETFs and redeem the units in the market. PSUs have seen an increase in their public floats, and that has been weighing heavily on these stocks. Postponing the divestment in a weak market may bring some relief, though we have yet to see how much divestment will be done at a later stage,” said a market strategist at a domestic brokerage firm, who did not want to be named.

As such, much would depend on when and which listed companies make the next tranche of divestments, particularly considering that the broader markets have been weak. Given enough time before the next divestment, perhaps some of these stocks may be able to outperform for now.