PSU offers in 2007 and 2008 delivered reasonable returns to investors, despite the meltdown that followed. Unlike their private sector peers, even in a bull market, offers for sale or IPOs from public sector companies were priced quite modestly, leaving money on the table for investors.
After being also-rans in the bull market from 2003 to 2007, listed PSUs saw a revival of interest after the 2009 election verdict. The BSE PSU index rose 39.5 per cent post-elections, beating the 24 per cent surge in the BSE-500 and the 20 per cent rally in the Sensex in the same period. Expectations that the UPA Government, unencumbered by objections from the Left parties, will push through stake sales in central PSUs contributed to the rise in stocks of government-owned companies.
Stocks with 92-99 per cent government holdings — such as NMDC, MMTC, RCF and Neyveli Lignite —were among the top gainers, with returns of 45 per cent to 104 per cent. The hope that divestment will get a push under the new UPA regime appears justified on three counts.
Why Divestment?
One, government-funded stimulus measures and a soaring subsidy bill have swelled the fiscal deficit. With the economic slowdown impacting revenue receipts, divestment is clearly one route to raising funds to improve the fiscal picture. The fiscal deficit for the year 2008-09 at a whopping Rs 3,30,000 crore, is 21 per cent of the total market capitalisation of the BSE PSU index.
Though proceeds of duvestment since 2007 have gone into the ‘National Investment Fund’, expectations are that divestment proceeds will now come back into the Budget and help fill the fiscal deficit.
Two, IPOs from unlisted government owned companies could well help revive the IPO market and boost the stock market. Both the Congress manifesto and the interim budget emphasised the need for divestment. PSUs where the government stake is much higher than 51 per cent may be the ones where stake sales will be pushed through first.
Backdrop to divestment
Divestment of stake in central public sector units has netted Rs 53,400 crore since 1991. Though it was the Congress government that first set the ball rolling on disinvestment and privatisation, the trend really gathered pace during the NDA regime (1999-2004). During these years, the government sold stake in as many as 21 Central Government owned companies, raising Rs 28,000 crore.
This government also flagged off divestments through the strategic sale route- sale of a large block of shares in a PSU with transfer of management control to a private sector partner, through a process of competitive bidding. Modern Foods, BALCO, Hindustan Zinc, IPCL and VSNL were divested through this route to Hindustan Unilever, Sterlite Industries, Reliance Industries and the Tata group.
However, the return of a coalition government at the Centre in May 2004 slowed the pace of divestment. There was controversy about whether the earlier strategic sales were made at valuations that were too low.
There were minority stake sales in the last five years amounting to around Rs 8,700 crore. This period saw disinvestments in companies such as NTPC (5.25 per cent of stake, approved by the NDA government), Power Grid Corporation and REC, mainly through the public offer route as well as the private placement of shares of Maruti Udyog limited.
Thus far, 64 per cent of the amounts raised from divestment have come in from sale of minority stakes in companies, while strategic sale and residual sale chipped in with 23 per cent. This suggests that the Congress is likely to lean towards divestment of minority stakes in PSUs through the IPO route, for profit-making CPSUs. However, strategic sales in loss-making companies too may be considered.
The candidates
With only 44 of the 242 operational CPSUs listed, this government may see some big-ticket delisting. The listing candidates may include Coal India, RINL, Manganese Ore, Cochin Shipyard, Air India and BSNL .
In the case of banks, there has been a dilution of government stake due to expansion of capital (fresh issue) by these banks to meet their capital adequacy requirements. But there still appears to be some scope for banks with high government stake to raise capital.
What’s in it for investors?
Stake divestment in PSUs may bolster the government’s finances at a time when it is looking to spend its way out of the slowdown.
But have these shares delivered for investors who bought into the stocks during the offer? An analysis over the past five years shows that they did deliver reasonable returns.
Eight of the 16 public sector units/banks that tapped the IPO market in the last five years out-performed the BSE Sensex. PFC, REC, Power Grid Corporation and Indian Bank are some recent issues that outperformed the indices. It bears mention that the recent crop of PSU offers in 2007 and 2008 delivered reasonable returns to investors, despite the meltdown that followed. Unlike their private sector peers, even in a bull market, offers for sale or IPOs from public sector companies were priced quite modestly, leaving money on the table for investors.
In certain cases, discounts to prevailing market prices have been offered to retail investors. These factors made sure that the majority of PSU stocks divested, even in the bull markets of 2007 or early 2008, still delivered positive returns.
For the companies that tapped the primary market in last few years, the market returns have been mixed, with more recent issues such as Power Grid (70 per cent CAGR against BSE-500’s return of 8 per cent since the time of listing) and Rural Electrification (34 per cent) out-performing the market. However, older issues such as GAIL (17 per cent CAGR since time of offer to retail investors in 2004) and ONGC (16 per cent CAGR) have underperformed the market. NTPC was a market performer from the time of its IPO. Maruti Udyog (Maruti Suzuki) recorded a 40 per cent CAGR from the time of its IPO in 2003.
Financials
What about financials? Does the argument that private ownership bolster efficiency and performance hold good? A study of the financial performance of companies shows that ownership did not make much of a difference to this; whether companies fared better after privatisation depended on sector and macro developments.
Companies such as Hindustan Zinc, IPCL (later merged into Reliance Industries) and CMC did improve their margins and return on equity in the years following divestment.
VSNL, also sold through the strategic sale route, has not registered a material improvement in performance. The loss of VSNL’s monopoly status in its business due to the relaxation of entry barriers, contributed to fall in the company sales in the last few years, leading to drag in margins (net profit margins down to 9 per cent in 2008 from 17 per cent in 2003).
Yet, both Hindustan Zinc and IPCL (later merged) did manage a significant ramp up in profit margins and Return on Equity after they were sold to private owners.
In offers for sale, where the government remained the majority owner, companies such as NTPC, ONGC, GAIL have seen some improvement in the profits and ROE, post-offer but this has little to do with disinvestment. Dredging Corporation and MTNL are the instances where margin and profitability fell owing to a loss of monopoly status.
http://www.thehindubusinessline.com/iw/2009/05/31/stories/2009053150280700.htm
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