Use PSU OFS issues for short-term gains

5% discount should not be deciding factor for long-term retail investors

Savvy retail investors who subscribed to the Coal India offer for sale (OFS) last week have made a tidy sum in a matter of a few days. Those who bid at Rs 340 at a 5% discount to the offer price of Rs 358, have or stand to make pre-tax gains of about 7% at Wednesday's closing price of Rs 365.

Forthcoming PSU OFS issues will also offer a 5% retail discount, which means the potential for quick gains remains high. Typically, share prices see a 4-5% correction between the time the OFS is announced and the day of offer. Throw in another 5% discount over the offer price, and retail investors can technically buy the stock at about a 10% discount to the secondary market price prior to the announcement of the share sale. 

“The OFS issues offer a good short-term trading opportunity for savvy retail investors,” said Rikesh Parikh, VP - institution corporate broking, Motilal Oswal Financial Services.

Note that those selling shares before a year have to pay a flat tax of 15% on their short term capital gains. Retail investors can invest up to Rs 2 lakh in a public offering. 

The government is looking to offload stakes in ONGC, Hindustan Zinc, Power Finance Corporation (PFC), Rural Electrification (REC), NHPC and Balco.

However, investing in PSU OFS issues for the long-term just because of the 5% discount may not be a sound strategy. According to Sandip Sabharwal, an investment adviser and a former fund manager, the OFS may offer a cheap entry point for those who have already zeroed in on a particular PSU stock but may not necessarily be a good investment opportunity otherwise.

“The 5% discount should not be a deciding factor for investing in a PSU OFS. You should analyse the company balance sheet, its expansion plans, management capability, growth prospects and the diversification it offers in your overall portfolio before opting to put money,” said DD Sharma, CEO, Risk Capital Advisory Services.

Notably, all of the last 12 PSU OFS issues (excluding Coal India) have underperformed BSE 100. None of the issues, except SAIL, had a retail quota or offered a 5% discount. But even assuming a 5% discount in these issues, RCF is the only stock which has managed to outperform BSE 100.

Some analysts believe that with the new government in place, this may be a good time to invest in quality PSUs. Governance and transparency may improve in the coming months, which may lead to a re-rating of PSUs.

However, not everyone agrees. Sabharwal, for his part, feels that re-rating may be some time away and the PSU pack may underperform in the near term. “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.