The underperformance of state-run companies in domestic stock markets is expected to weigh on the government’s ambitious asset sales target of 1.05 trillion this fiscal.

The BSE PSU Index, which comprises 61 stocks, has fallen 7.91% since 1 April. That compares with the 4.65% gain in the benchmark Sensex in the same period.

Some state-run firms, including Indian Bank, Chennai Petroleum Corp. Ltd, IFCI Ltd, Oriental Bank of Commerce, Central Bank of India, and Allahabad Bank, have lost as much as 35-55% of their market value since April.

Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

Finance minister Nirmala Sitharaman had in the Union Budget 2019-20 set a record disinvestment target for the fiscal, an increase from 90,000 crore projected in the Interim Budget 2019-20.

The government has, however, managed to raise a meagre 15,483.05 crore so far. With only four months left for this fiscal to end, achieving the disinvestment target appears a tall task.

“PSU (Public Sector Undertaking) stocks are non-performing for few reasons: estimated fiscal slippage in FY20 and low disinvestment by the government this year so far," said Madan Sabnavis, chief economist, Care Ratings. “Low share prices may in fact result in low valuations of PSU stocks when the government sells stake."

Since July when the budget was presented, the BSE PSU Index has shed 10.16% while the Sensex has risen 2.70%.

The government has stuck to its fiscal deficit target of 3.3% of gross domestic product (GDP) for FY20 despite revenue collections falling short of estimates. This makes it even more crucial for the government to sell stakes in state-run firms to raise funds.

From the fiscal deficit standpoint, disinvestment proceeds will be key to bridge the revenue shortfall, given the lower-than-expected collections in goods and services tax (GST) and the recent cut in corporate tax.

In September, the government cut the effective corporate tax rate to 25% from 35%. GST collections by the Union and state governments fell 5.3% year-on-year to 95,380 crore in October, but grew 3.8% sequentially, according to official data.

According to a Mint analysis of 60 PSU firms where the government can potentially dilute its stake to 51%, it can garner more than 2 trillion. Bharat Petroleum Corp. Ltd (BPCL) leads the pack where the government can sell its entire stake to garner 31,993.50 crore based on its 19 November market cap, followed by Coal India Ltd with 15,552.78 crore, General Insurance Corp. of India with 13,417.68 crore.

Banks alone can fetch more than 70,000 crore, with State Bank of India itself achieving 10,323.40 crore.

Sabnavis at Care Ratings said the government is likely to meet the disinvestment target “by buying their own PSU companies or buybacks".

“It is a standard practice for the government to sell stake and meet disinvestment target towards the end of fiscal. However, government’s strategic sale looks unlikely," he said.

According to analysts, the disinvestment process is expected to send a signal about the Narendra Modi administration’s commitment to economic reforms and is likely to boost market sentiments.

“A vital cog to meet the desired fiscal target will be the divestment programme in PSUs. The new planned divestments include the much-awaited strategic sale of Air India and initial public offering of RailTel Corp. and Indian Railway Finance Corp. both of which collectively are expected to fetch an additional 1,500 crore and still leave a yawning gap between the budgeted divestment proceeds and actual," Elara Securities (India) Pvt. Ltd said in a report on 19 September.

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