Divestment likely to keep PSU stocks on investor's radar, say analysts

Analysts remain bullish on stocks of public sector undertakings (PSUs), especially the ones that are likely to be divested, and suggest investors accumulate them at the current levels from a medium-to-long term perspective.

“There are a lot of PSU stocks that have not participated in the market rally. The fall from their peak levels is a good opportunity to buy from a medium-to-long term horizon. I am confident that the government will be able to achieve fiscal 2021-22 (FY22) divestment target. Due to the ongoing second wave of Covid, it may dole out some relief measures, which will cost money. To fund such initiatives, it will have to go aggressive on divestment once the market conditions improve,” says G Chokkalingam, founder and chief investment officer at Equinomics Research.

In April, the government said that the timeline for disinvestment of Air India and Bharat Petroleum Corporation (BPCL) may be pushed by two to three months due to the second Covid-19 wave. It, however, is confident of wrapping up the sale of the two companies by FY22 and meeting the disinvestment target of Rs 1.75 trillion during this fiscal.

Selling stake in government-controlled enterprises will be an uphill task for the government, especially in the ongoing pandemic that has dented market momentum, feels A K Prabhakar, head of research at IDBI Capital. He, however, has pinned his hope on the second half of this fiscal when the economy emerges from the shadows of the Covid pandemic aided by accelerated vaccination.

“The government should pluck the low-hanging fruits – companies like Balco etc. where divestment is relatively easier as compared to larger companies like Air India and BPCL. It will create a positive sentiment in the mind of the investors, too, as regards the divestment process. There are a number of PSUs that are trading at attractive valuation that investors can buy from a medium-to-long term perspective. They will reap gains once the divestment process gathers steam,” he says.

Besides Air India and BPCL, Shipping Corporation of India (SCI), Container Corporation of India (CONCOR), IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam are some of the other public sector companies that are likely to see government cut its stake in, reports suggest.

Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas also shares a similar view and says the Government’s divestment target of Rs 1.75 trillion in FY22 appears optimistic and the process could get delayed to the second half of the current fiscal (H2-FY22).

“For the leading PSU companies, the share prices are not reflecting any deal-related premium. In this backdrop, a delay in divestment could lead to PSU stocks’ underperformance in the near-term, but attractive valuations and cyclical earnings recovery should ensure downside support to share prices in the medium-term,” he said.

The prized catch among the lot, according to analysts, is state-run refiner and marketer BPCL. The stock, they analysts suggest, stands a good rerating chance given its operations and the vast assets, including the land bank, once the company’s divestment process gathers momentum.

“Our expectation on reserve price is around Rs 500/share and this includes a potential dividend of Rs 50-60/share out of cash proceeds from sale of its stake in Numaligarh refinery and BPCL trust share of 7.33 per cent. At this price, government stake should be worth $6.9 billion and total payout to acquirer would be between $6.9 billion to $10.3 billion, depending on what is the response to open offer,” wrote Anubhav Aggarwal, Krati Sankhlecha and Sayantan Maji of CLSA in a recent note.