PSUs off to a flying start in new year

But for rally to deepen and sustain, government needs to clear the air on disinvestment.

The BSE PSU index, the barometer of state-ow-ned firms, is off to a flying start in the New Year. But like Team India down under, the tail-enders are doing better than the top guns. In the first four sessions of the New Year, the PSU index, that comprises 35 companies and 25 banks, gained 5.38 per cent, more than double the 2.6 per cent gain recorded by the benchmark Sensex.

However, this rally is driven largely by a few small stocks, with very low public shareholding. These stocks, each held by a few thousand investors, have rallied between 15 per cent and 45 per cent in the New Year. On the other hand, some of the widely held stocks among PSUs have behaved in a less exuberant manner.

According to the data provided by BS Research Bureau, five top gainers among the state-owned firms have a base of 176,000 investors between them. These stocks — MMTC, Hindustan Copper, STC India, Andrew Yule and Dredging Corp of India — have gained between 26 per cent and 45 per cent this week.

On the other hand, the larger and widely held public sector stocks have had a mixed week. Of the five large companies, that had a public shareholder base of between 200,000 and 800,000 investors, three gained and two ended with losses. Coal India was the top gainer among these five at 6.6 per cent, followed by SBI (4.46 per cent) and ONGC (2.08 per cent). NTPC and Indian Oil ended the four-day period with losses.

Market experts are not too confident about the rally in the smaller stocks. “There seems to be lot of excitement about the moves by Sebi, but that does not justify such a rally. These PSU stocks are not held by the market. Nobody (among the larger investors) owns them. I am not sure what is driving these stocks,” said a senior fund manager with a PSU-bank owned fund house. According to him, for the large cap stocks, it’s still a mixed bag.

Sanjay Sinha, founder, Citrus Advisors, also feels the gains are driven by stock specific factors. “The rally in Coal India is due to the recent changes in the pricing policy. Similarly, some PSUs stocks that had follow-on offerings lined up may have benefited from the Sebi move to allow auctioning and institutional placements. However, the overhang of vacillating government policy still remains large for the pack,” Sinha said.

According to him, a structural rally is possible only when key policy issues are addressed. “For example, in the oil sector, the structural drag of PSU oil companies not being able to realise the price of fuel due to the subsidies still remains. What is important is such policy issues dragging the fundamentals need to be addressed. Only then will there be a structural rally in PSU stocks,” Sinha said.

Another huge uncertainty is government indecision over the disinvestment programme. After shelving the public issues of ONGC, SAIL and Hindustan Copper, the finance ministry has been exploring options such as buyback, cross-holdings, etc .

However, this has become a negative for these stocks, as the street is reading these as attempt, to use the surplus cash on balance sheets of these firms for meeting the government’s fiscal deficit target. “Why should the government take such convoluted routes of buyback and get tongues wagging? A special dividend would be a more elegant way of doing it. It will be a win-win for government and minority investors,” said Phani Sekhar,fund manager- PMS, Angel Broking.

Experts believe in addition to the bad perception about buybacks, it is not a very efficient way of raising money for the government. The price of the buybacks will have to be decided according to Sebi mandated formula based on historic market prices, which have fallen considerably. When the government tenders its shares, it has to tender at these compressed prices. “On the other hand, a special dividend will enable the government to raise cash without paring the stake. In case of a private company, buybacks are preferred because they are tax efficient. However, in this case, the government is both the largest shareholder and the sovereign, so even tax comes to its kitty,” said Sekhar.

The government seems to be listening. After yesterday’s Rs 3,964-crore interim dividend from ONGC, OIL India also declared an interim dividend of Rs 25 per share translating into a Rs 471 crore income for the exchequer.