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Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Why privatization of public sector firms can add a sweetener after the cut in tax

  • Ownership change can help companies become more focused on returns optimization
  • A case in point is Concor, which is in container rail transportation business in India

Shares of Bharat Petroleum Corp. Ltd (BPCL), Container Corp. of India Ltd (Concor), and Shipping Corp. of India Ltd extended gains on Thursday, rising 2.5-10%.

CNBC-TV18 reported that the government is considering selling its entire stake in these companies, driving their stocks higher.

Whether the government is considering privatization or stake sales will be clear in time. Analysts, however, said that privatization can fetch the government higher revenues.

Kotak Institutional Equities research said that minority stake sales till now have only yielded limited financial benefits due to sub-par valuations of the public sector companies. Instead, if the government decides to cede majority ownership and privatize these companies, then it can derive much better value.

“We believe the government can raise significantly higher amounts if it were to privatize the PSUs through (1) strategic sale of a majority stake or (2) sale of its shares in tranches to institutional and retail investors with an explicit commitment to reduce its holding to below 50%," pointed out Kotak analysts in a 25 September report.

“We would strongly argue against golden share or any form of residual government control as it would lead to valid concerns about continued government influence on the operations of the companies," added Kotak.

An investor will value ownership control and management freedom more than being a passive partner. Ownership change can also help companies become more focused on returns optimization, which is key for minority shareholders.

A case in point is Concor, which is in container rail transportation business in India. The company, whose valuations are not particularly cheap, has been investing in multi-modal logistics parks (MMLPs) to sharpen its competitive advantage.

But as analysts at SBICAP Securities Ltd said, the company is yet to see benefits from the investments. A private owner may have been more dynamic in capital allocation. “Return on capital employed has been trending lower for Concor over the last decade as large investments in MMLPs are yet to fructify," analysts at SBICAP Securities said in a note.

Perhaps the case for strategic divestment is the strongest for BPCL. “We are even more optimistic about the privatization of BPCL on three grounds. First, the latest tax rate cut and roll-back of stock market related taxes suggests GoI is finally doing big bang reforms, which are welcomed by investors. Second, the latest income tax rate cut would lead to large loss of revenue for GoI, which could be made up by the privatization of BPCL. And, thirdly, privatization would improve the broader market sentiment," said ICICI Securities Ltd in a client note.

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