PSU OFS: Be selective, be safe

While it might provide short-term gains, a 5% discount isn't enough to build a strong long-term portfolio

Savvy retail investors who sold Coal India shares within days of subscribing to the company’s offer for sale (OFS) last Friday would be sitting on a tidy profit. Those who bid at the floor price of Rs 358 and got the shares at Rs 340 apiece after the five per cent discount would have made pre-tax gains of 4-7 per cent, depending on the day the shares were sold - not a bad return in less than a week. At Thursday’s closing price of Rs 369.5, the gains amount to 8.6 per cent.

The government is now looking to offload stakes in ONGC, Hindustan Zinc, Power Finance Corporation (PFC), Rural Electrification (REC), NHPC and Balco with similar discounts, implying that investors will now get many more opportunities. Retail investors can invest up to Rs 2 lakh in a public offering.

Market experts say there will be an opportunity for quick gains for two simple reasons: One, the discount factor and two, the share prices of the companies take a beating as soon as the OFS is announced. In Coal India’s case, the share price fell 4.5 per cent in a single day. “The OFS offer a good short-term trading opportunity for retail investors,” said Rikesh Parikh, vice-president (institution corporate broking) at Motilal Oswal Financial Services. However, there will be a tax of 15 per cent on short-term gains when the holding period is less than one year.

Can you build a portfolio around these public sector unit (PSU) OFS? While it might work in the short-term, experts say it need not be a great strategy for the long-term. Reason: the past 12 PSU OFS (excluding Coal India) have under-performed BSE 100 from the time of their OFS till date.

None of the issues, except SAIL, had a retail quota or offered a five per cent discount. But even assuming a five per cent discount, RCF is the only stock that has managed to outperform BSE 100 even after accounting for dividends. Three scrips have actually fallen. Clearly, the discount cannot be a deciding factor for long-term investors.

According to Sandip Sabharwal, an investment adviser, the OFS might offer a cheap entry point for those who have already zeroed in on a particular PSU stock, but might not necessarily be a good investment opportunity otherwise. “PSUs will not be able to grow as aggressively or create the kind of shareholder value as their private-sector peers in a fast-growing economy,” he said.

The fortunes of quality PSUs might change if the new government is able to put more transparent systems and there is better governance. This might lead to a re-rating of PSUs, say some analysts. What works in PSUs’ favour is that they typically have a strong cash flow and pay regular dividends. But there are too many ifs and buts here.

Anyway, investors are advised not to dabble too much in direct stocks. The PSU stocks’ fortunes are linked to the government. Some like REC and PFC might shine because of the recently-announced reforms in the power sector. Both these stocks have gained 70 per cent and 90 per cent, respectively, in the past year, more than the gains posted by BSE 100 (46 per cent) and BSE PSU Index (-11 per cent). On the other hand, there are many who continue to suffer. Building a portfolio with discounted PSU offers might not be a great strategy. Be selective, be safe.