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Divestment and investment - Views on News from Equitymaster
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  • Jul 28, 2003

    Divestment and investment

    The PSU disinvestment story has been in the limelight for the last few weeks. However, this time, more so for all the negative news. The uncertainty surrounding the continuance of divestment programme, especially due to the hazy stand taken by the government, has led to some volatility being witnessed in the PSU sector. Our poll on this issue could not have come at a better time than this.

    However, it must be noted that all decisions, whether confirmed by respective ministries or unconfirmed grapevines, seem to have a bearing on the stock price movements (at least for the short-term) of the companies that are slated for divestment. This is precisely what we tried to gather through our poll i.e. people’s perception towards investing in stocks of companies riding on the divestment wave. The graph below shows the result of the same.

    As can be seen above, 78% of the voters seem to base their investment decisions in PSU stocks just based on disinvestment with the hope of earning a quick buck. And, if the divestment process is concluded at a price, which is below market expectations or below the ruling market price, then the stock faces the investor wrath. A simple example to justify this could be the disinvestment of Punjab Tractors, wherein the Punjab government sold its stake to a private equity fund for a price which was at a discount to the then prevailing market price. Investors reacted strongly and the stock lost almost 14% in a single trading session.

    Disinvestment story going strong...
      March 31, 2003 June 30, 2003 Change (%)
    EIL 245 328 34%
    NALCO 71 112 58%
    BPCL 222 284 28%
    HPCL 294 350 19%

    However, all is not as bad as it seems. There were still 20% of the people who voted that their investment decisions are independent of the divestment story. These people are more so from the category of investors who look for value and growth over the long-term rather than ‘triggers’ for the stock to perform in the short-term. The balance 2% remained undecided.

    Disinvestment uncertainties spoil the party...
      June 30, 2003 July 25, 2003 Change (%)
    EIL 328 279 -15%
    NALCO 112 105 -6%
    BPCL 284 268 -5%
    HPCL 350 333 -5%

    Our view:
    Though Mr. Shourie’s commitment can hardly be challenged, select parties in the ruling coalition do not share his vision. Neither does the opposition! With general elections in government’s focus already, investor’s should view the process of disinvestment with caution. There is no point in blaming the government for the same. Having said that, select PSUs offer good long-term investment potential, not just based on disinvestment but also on fundamentals.



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