Evaluate PSU public issues more carefully this year

Mar 7, 2011

In this issue:
» Is this the right time to invest in hotel stocks?
» A bigger threat than oil prices
» Countries that are higher than India on the corruption scale
» What could be Buffett's agenda on his maiden India visit?
» ...and more!

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Rs 8 m of borrowings per minute may sound gargantuan! But a calculation by a business daily from the fine prints of the government's budget documents throws up exactly this number for 2011. While the fiscal planning for the next few years has pleased most of us, it seems there is a lot more to be read into. Debt financing of most government schemes is a potential hazard. For with rising prices of food and oil, the centre's subsidy burden will rely heavily on debt. In addition the projected fiscal deficit number may not remain sacrosanct. India's fiscal position with a deficit of 45.3% for FY11 could seem benign; especially when compared to the developed world's. But factoring in some unaccounted debt programmes could bring the number to 49.9% for this fiscal.

The only solution to keeping the government's debt obligations in check is milking its stakes in PSUs. The Finance Minister too did not mince words on this while setting the PSU disinvestment target for FY12 at Rs 400 bn. But it remains to be seen whether the companies manage to fetch the valuations that would yield the desired results. With no windfalls gains like the 3G auctions at its disposal this fiscal, the government will be banking heavily on the PSU issuances in 2011. Its inability to sell the stakes in the PSUs could further add pressure to the country's fiscal targets. Thus the PSU public offers that turned out to be the welcome bargains for investors in 2010, may be priced dearly. While we are aware of the government's compulsions to do so, investors would do well for themselves by judging the offers with a strict eye on valuations.

Do you think the PSU issuances could be over priced this year? Let usknow your views or post them on our Facebook page.

 Chart of the day
The value of gold held in the government reserves has risen by 457 times in the past three decades. One would assume that the weightage of the yellow metal may also have risen, if not proportionately during the years. However the weightage of gold in India's reserves currently stands at one of the lowest when compared to historical levels. What this also means is that India's exposure to foreign currencies remains quite high. Given the precarious state of currencies like the dollar, the euro and the yen, probably it is time that the government shifts more of its focus onto gold.

Data source: Economic Survey 2010-11

The equity markets in the US and Europe are offering little hope for extraordinary returns. Hence, investors are increasingly looking at more The hospitality sector has been a lot in the news recently. The smart recovery made by the sector post the financial crisis is nothing short of spectacular. This has been thanks to an increase in foreign traffic supported by the Indian tourists who have been bitten by the travel bug.

But is it the right time to invest in hotels? If recent reports are to be believed, then it may take up to 2-3 years for the hotel industry to reach the success levels of 2007. The reason behind this is the addition of 80,000 new rooms over the next 2-3 years. As a result, room rentals would continue to be under pressure. Adding to this is the entry of international players and the availability of quality options in the mid market and budgetary category. With all the bad news coming out, it is no surprise that the share prices of hotel stocks have fallen. But what is not being said in these reports is that lower room rentals would ensure higher occupancy. This would ensure stability in earnings going forward. Hence, what we have here is a window of opportunity for the patient investor.

So which is the bigger problem for global growth? Rising fuel prices or food prices? If you think that its oil because of the ongoing Middle East crisis, think again. True, oil prices have risen on account of unrest in that region. But the only scenario where oil will pose a much bigger threat to global growth is if the crisis spreads to Saudi Arabia. Also, higher oil prices would certainly dampen consumption, which will put downward pressure on prices at some point. Food is a different story altogether and is certainly a bigger threat to global growth. This is because food prices are widely expected to continue rising. This is partly on account of a recent spate of crop-damaging weather, and also due to rising living standards around the world having pushed up demand for meat. And poorer nations will feel the burden more as food accounts for a larger chunk of the household budget. Indeed, emerging markets are currently driving global growth led by their faster growing economies. But at the end of the day if there is not enough food to go around, this growth will not have much value.

The Chinese economy clocked an average 11.2% growth in the last five years. Can it repeat a similar feat in the coming five years? We do not know. We have been constantly hearing about scams and scandals in our country. But the corruption gene is not just our cultural heritage. If a report by Fitch (a global credit rating agency) is to be believed, India is not as corrupt as China and Russia. Corruption does not deter investors in India the way it does in China. The Indian legal system, despite all its shortcomings, is quite respected. What really concerns domestic and foreign investors then? It is the burdensome regulatory regime and the tax laws.

It is good to know that we are better off than China and Russia as far as corruption is concerned. But we believe these countries are not the right benchmarks in this regard. We should take economic lessons from China and just stick to that. For law enforcement and governance standards, we should look elsewhere, maybe some place like Singapore.

Global warming has been one the most serious issues for the global economy. Most developed and developing nations are supporting the effort in reduction of green house gases. Even India is not an exception to this. However, apart from being a signatory to Kyoto Protocol, India has taken various other initiatives so as to promote clean energy. For instance, the government imposed a cess on coal in July 2010. It has also collected about Rs 31 bn till date through imposition of cess and another Rs 34 bn is likely to flow into the corpus by 2011-12. The funds collected via imposing the cess will be used for the green India mission. But surprisingly the policymakers are yet to decide on how to use the funds effectively!Widespread forest degradation for pecuniary benefits can have a long standing effect on the environment. Attracting a minor levy on raw material inputs used for generating power will at least help build a fund that can be utilized to restore environmental balance. However, how effectively the government utilizes the corpus is a moot question. Secondly, the extent of levy is another issue to grapple with. As coal is a primary source of input for generating thermal power the cess mathematics has to be carefully designed.

Mr Hari Narayan may not be a man most of us are well acquainted with. But his claim to fame besides being the chief of IRDA is meeting the legendry Warren Buffett. Yes, Mr Narayan will be amongst the lucky few to meet Buffett on the latter's maiden visit to India this year The 'Oracle of Omaha' will visit India for the first time, to propagate his charity mission. But, for the 80 year old billionaire, business is always on his mind. According to a leading business daily, he has sought a meeting with the chief of insurance companies in India. We can only hypothesize as to how the meeting would go forward. We expect discussions on the global and domestic insurance industry. Lobbying for the government to raise the FDI cap in insurance from 26% to 49% could also be on the cards.

Buffett's flagship company Berkshire Hathaway has recently tied up with Bajaj Allianz to act as an agent for online sale of the latter's insurance products. In fact Buffett recently stated that his company is sitting on a pile of cash and is looking keenly at acquisitions. However, in his trademark style he kept us guessing on what businesses he would be considering with his words "our elephant gun has been reloaded, and my trigger finger is itchy". We hope that with this visit Buffett will also look at picking up stakes in Indian businesses with solid long term value propositions.

While the Indian stock markets had a very week outing today its peers in Asia ended on a mixed note. The BSE Sensex was trading 270 points (1.3%) lower at the time of writing this. Along with India, Japan and Korea lead the pack of losers. The European markets have also opened on a negative note.

 Today's investing mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring." - George Soros

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6 Responses to "Evaluate PSU public issues more carefully this year"

Chuck Johnson

Apr 12, 2011

The only solution to keeping the government's debt obligations in check is milking its stakes in PSUs.


Manoj Kumar

Mar 8, 2011

Evaluation is fine but government is unlikely to overprice its issues of public offers. There are a few reasons for that i) Government wants to look good in the eyes of common man, ii) These PSUs may not be the apple of the eye of the investors, iii) Lastly there will be the fear of under-subscription.


g d shah

Mar 7, 2011

presently retail investors are heavily lossing in psu stocks.
I think that this situation does not encourage the investor.



Mar 7, 2011

on the contrary i believe the govt in order to raise more resources thru this psu sale route will have to price the issuance at more attractively and will have to leave something on the table and thus this year cud turn out to be a good year for long term psu invesors.


Baljit Mehtabaljit mehta

Mar 7, 2011

marketing of PSU's will be spread over the whole. As of now SAIL and ONGC are likely to be marketed in the very near future. Their prices are at a fairly low level at this time. Similarly any othr PSU shares are markted within the next three months, they are also not likely to be over priced. Therefore investors interested in these shares could consider investing in them at this time.


Agnel Pereira

Mar 7, 2011

One important thing you may wish to consider is, contrary to PSU disinvestment that is expected to bring relief to the government, there are currently a spate of PSU bank preferential issues (Corporation Bank, IOB are only some of them) where the allotment is to the Government of India. So, a part of the money raised from PSU disinvestments such as Coal India, MOIL etc will be gobbled up by these PSU bank issues.

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