PSU divestment hopefuls outperform markets

Stocks like BEML have risen as much as 300% in the past one year

Stocks of divestment /stake sale probables like Steel Authority of India Limited (SAIL), Mahanagar Telephone Nigam Limited (MTNL), National Aluminium Company (NALCO) and Container Corporation (CONCOR) have outperformed the markets in the past one year.

Most of the stocks from the PSU basket that are either classified as sick units that can be sold-off or where the government can divest some of its shareholding have gained up to 300% in the past one year, with stocks like BEML (up 295%), MTNL (up 150%), SAIL (up 110%), NALCO (up 107%) and FACT (up 85%) topping the chart.

In contrast, the S&P BSE Sensex and CNX Nifty have moved up nearly 33% each in the past one year. The S&P BSE PSU index has gained 42% during this period.

According to reports, the government plans to sell 5% stake in SAIL around Diwali in October 2014, followed by Coal India.

"The government is trying to drive efficiencies in a lot of public sector companies. This has been a clear cut agenda for the government that they'll try and create more autonomy for PSUs to try and get them at par with the private counterparts. One needs to evaluate companies on a case-to-case basis as each company has a different set of factors working for and against it," said Mayuresh Joshi, vice-president (institutional), Angel Broking.

Besides these two, it has identified about a dozen other companies in which the government could offload shares this financial year, reports suggest. Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Tehri Hydro Development Corp (THDC), SJVN, NHPC, CONCOR, MMTC, NLC and MOIL are some of the other companies where the government could cut its stake via the offer-for-sale (OFS) route.

Points out Amar Ambani, head of research, India Infoline Group: "I do believe that there will be some interest in the divestment process as investors who are now warming up to the market or who think that they missed the bus would like to jump in. Having said that, I don't think the government will be in such a hurry to divest immediately. They may wait for the second-half of the year or closer to the last four months of the current financial year to go into divestment overdrive in a hope that till then there will be a further appreciation in stock prices."

STOCK STRATEGY

Analysts say the recent run up in these stocks could prove to be an overhang in some of these stocks. One also needs to assess at what price / valuation does the government offer the shares.

Usually, when the government does dilute its stake, it is at a discount to the prevalent market price.

"Unless we see a substantial improvement in fundamentals, I don't think one should buy such stocks given the run up and play any divestment story. There are ample opportunities for investors in the large-and mid-caps. There is no point getting into a stock where absolute comfort is missing. However, in case of ONGC and Coal India, there are other triggers besides the divestment that can play out like deregulation of diesel prices, gas price hike etc," Ambani of IIFL says.

"At a fundamental level, I believe, cash flows are important aspect to consider besides giving these companies autonomy. I suggest investors wait for these efficiencies to come about before making an investment decision even when the government looks to divest its stake. I don't expect fundamentals to change overnight. Power financing stocks like PFC and REC are qualitative stories and investors need to have an investment horizon of three - four years if they invest in these stocks via the government's divestment programme," Joshi of Angel Broking suggests.

Adding: "We feel there is a lot of value in Coal India but it is not getting exhibited properly due to several factors. Investors should not rush in to buy every stock whenever the divestment is announced. It is advisable look at the fundamentals of each company and then take an investment call from a long - term horizon."