Tough task as PSU stocks lose quarter of their value in one year

The Union finance ministry might be planning on scaling down the revenue target through disinvestment in public sector companies but even the pared target may prove to be difficult to meet with the market capitalisation of these firms falling 24 per cent over the past year.

The government raised only Rs 13,344 crore through disinvestment during the first 10 months of the current financial year, a fraction of the targeted amount of Rs 69,500 crore announced in the Union Budget.

Raising money from disinvestment in the next financial year looks even more difficult, given the continued decline in PSU stock prices.

A global meltdown in commodity prices and the difficult environment at home has taken a toll on profitability and market capitalisation of public sector heavyweights such as State Bank of India, Oil and Natural Gas Corporation, NTPC, Bharat Heavy Electricals, Coal India and NMDC, among others.

The country's top 63 public sector companies are currently valued at Rs 14.3 lakh crore, down from Rs 19.4 lakh crore at the end of January 2015.

As a result the PSUs' share in the market capitalisation has fallen to an all-time low, further complicating the government's disinvestment process.

The country's top 54 PSUs now account for just 17 per cent of the market value of all BSE 500 companies at the end of January 2016 down from nearly 20 per cent in the same period last year and a high of 36 per cent in January 2010. Nine new PSU companies were included in the BSE 500 after 2010.

In the last five years, government owned companies have cumulatively lost a quarter of their value, against 42.4 per cent rise in the combined market capitalisation of BSE500 companies.

A bigger problem for the government is the falling valuation of PSUs. With the exception of a handful of companies such as Coal India, Power Grid, Bharat Electronics and Bharat Petroleum Corporation, the market valuation of most PSUs is now either at par with their book value or below it.

The PSUs in our sample are currently valued at just 1.3 times their book value against 1.7 times a year ago and record high of 3.6 times in January 2010. In comparison, BSE Sensex companies together are currently valued at 2.6 times their book value.

Experts say that disinvestment at such a low doesn't make economic and financial sense at such low valuations.

"A promoter would rather own the business rather than sell it at book value. Disinvestment at current valuation would be akin to a fire sale and I won't be surprised if the government defers disinvestment and looks at other avenues to raise resources from PSUs," said Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services.

Book value is calculated by dividing net worth by the number of outstanding shares.

Others say that PSUs are at the bottom of the valuation cycle and the government should wait for the market to improve rather than force it on the market.

"The government should learn from the private sector and time its disinvestment according to the market cycle rather than making it an annual affair," said G Chokkalingam, the founder and chief executive officer of Equinomics Research and Advisory.

This means, for now, the government will have to rely more on special dividends like it has done in Coal India over the last two years, or tender shares in share buyback to raise funds from PSUs.

The non-financial PSUs in our sample were cumulatively sitting on cash and cash equivalents of Rs 1.55 lakh crore at the end of March 2015, down from Rs 1.71 lakh crore a year ago. A share of this pie in the forthcoming Budget will sure help the nation's finances.