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Oil PSU disinvestments – what’s your call

Jun 24, 2000

The stock markets yesterday resembled the much cliched roller-coaster ride. They were up a few percentage points during early trade. This was largely due to the rally in PSU stocks as markets awaited positive news from the Cabinet Committee on Disinvestments (CCD). However, with no so-called big-ticket disinvestments the markets reacted sharply and closed 72 points down.Was such a harsh reaction justified? Although, the speed of disinvestment maybe slow, the Government seems set at divesting its stake from non-strategic sectors. With the crusade being lead by heavyweights such as Finance Minister (FM) Mr. Yashwant Sinha and Disinvestments Minister (DM) Mr. Arun Jaitley, one can expect that the talks are not just lip service.

The sharp market reaction was more so because of the squaring of speculative positions built up on the hope of positive news. The long-term investor should remain unfazed by such volatility and continue to believe in those very people that they put faith in a year back.

In respect of the oil & gas sector, before we see any big-ticket disinvestment, that of Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) etc. There is a need to restructure the industry for the following reasons:

  • The Government has laid down a deregulation schedule and expects to completely deregulate the sector by 2002. This should unleash competition especially, in the marketing segment. Hence, it is important that the stand-alone refinery and marketing companies are merged with their bigger brothers to withstand competition.
  • If they are to be merged the disinvestment of these bigger companies should only be done post merger. This should result in better valuations and reduce the complexity of the merger.

Therefore, before the Government thrashes out a disinvestment programme it needs to finalise its plans on the future of the stand-alone refinery and marketing companies. The CCD has moved in the right direction:

  • Mr. Ram Naik, Minister of Petroleum & Natural Gas who was the main opponent for privatisation of the sector, has it seems seen the light of day and agreed for privatisation. First round of applause for the FM and DM.
  • It has been given the green signal for disinvestment in Indo-Burmah (IBP), the stand-alone refinery, this fiscal. It has also cleared 10% disinvestment in Indian Oil (IOC). Second round of applause.

With disinvestment in IBP one can reasonably expect restructuring of the stand-alone refineries. So before you give up hope, think again, all the PSU refinery stocks are trading at less than half their 52-week highs. Should you buy/sell will depend on your faith in the people you helped elect.

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