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Are you buying PSU funds to benefit from disinvestment... - Outside View by PersonalFN

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Are you buying PSU funds to benefit from disinvestment...
Jul 31, 2014

There are big hopes from the NDA Government. It is believed that the Modi-led-NDA Government would bring about sea level changes in the governance. In fact when the Bhartiya Janata Party (BJP) declared the name of Mr Narendra Modi as its prime ministerial candidate in September 2013, exuberance instilled and the markets ascended on the hopes of the 'acche din' (or a better a future). During such times and disinvestment programme on cards, stocks of Public Sector Undertaking (PSUs) have posted stunning returns since September 2013.

You see, it is said that policies of the UPA government were majorly responsible for poor industrial, lull in economic growth and tardy progress on infrastructure development. Moreover, it was the populist policies of UPA Government which put tremendous pressure on state finances. And thus for the last few years, managing fiscal deficit has become a tough task.

You must have read repeatedly over last 2-3 years, how bad governance can be responsible for economic growth rate to languish. Even today, the Government is constrained with limited revenue resources due to cooling economic growth. But now the Modi-led- NDA Government is planning to be focused on effective expenditure management. Massive reduction in number of centrally funded schemes is just one example of that. But like the UPA Government, the Modi-led-NDA Government too is looking at disinvestment proceeds as one major source of income for bridging the gap in revenue and expenses.

It is anticipated that, taking advantage of re-rating of PSU stocks, Government may be able to divest at good price and realise a huge chunk. The government has set an ambitious target of Rs 58,425 crore. This includes, Rs 43,425 crore from disinvestment of PSUs, while Rs 15,000 crore is expected to come from the sale of residual shares where the government has already sold its controlling stake. This has been the highest ever target that a Government has planned to achieve in any financial year.

Disinvestments: A shaky record
Data as on July 25, 2014
(Source: BSE, PersonalFN Research)

As depicted in the chart above, thus far the disinvestment programme of the Government as against the budgeted disinvestment targets is a stark underachievement. So going by that experience, the target set by the NDA Government looks quite ambitious.

But factors in favour...

The major argument that favours offloading of shares by the Government is robust market sentiment. In the past few years, nervous market sentiment was considered one of the big hurdles in achieving disinvestment targets. Moreover, unlike earlier, the Government has been exploring new routes to sell its stake. Success of CPSE ETF (which was used as a disinvestment route) would encourage the Government to be optimistic about achieving the disinvestment target. Furthermore, it is believed that, after the fiasco of NHPC IPO and disappointment with regards to a few follow-on offers, the Government started selling shares to retail investors at a discounted price.

So, what could the Government offer?

Taking a closer look at the divestment programme, it becomes clear that the Government is heavily depending on 2 companies for the success of disinvestment programme. It is expected to offload 10% stake in Coal India which may fetch Rs 24,258 crore, while sale of 5% stake in ONGC may add close to Rs 17,329 crore to Government treasury. There are about 30 listed PSUs where Government still holds more than 75% of shares. SAIL, NMDC, NHPC, NTPC, IOCL, Container Corporation, MOIL and MMTC among others are the well-known companies which might be disinvestment candidates. It is expected that the Government may follow Offer for Sale (OFS) route.

Should you participate?

PersonalFN is of the view that, the Modi-led-NDA Government is following the UPA's approach in carrying out disinvestment process which is contrary to the approach followed by NDA Government in Vajpayee regime. Under Vajpayee regime, it was decided that, the then Government would try to revive PSUs by improve governance and making them competitive. It was decided that, stake-sale might happen only when the revival plans looks tough to achieve. The idea was to try to transform companies by changing ownership and bringing in competitiveness.

However, the newly elected NDA Government which is grappling with the problem of limited revenue resources seems to be scrapping its own ideas while Mr Modi has been famous for his pro-PSU stance in Gujarat. Under him PSUs in Gujarat enjoyed greater autonomy and the thrust was on running them professionally. But even he appears to be convinced with the strategy of UPA Government of treating PSUs as cash cows. Contrary to sale of some loss making PSUs during 1998 to 2004, Modi-led-NDA Government has been planning to divest from some of the hugely profitable PSUs. For now it is uncertain whether the Government would achieve the disinvestment target.

Coming to an important question whether you should participate in divestment programme, PersonalFN believes your decision should differ from case to case basis. As in case of any other company; valuations, business prospects and efficiency of management among others should be considered as important parameters. PersonalFN recommends its investors to stay away from PSU funds, since being thematic in nature they expose investors to very high risk and their fortune is closely linked to the performance of PSUs as a theme. You see, it is only recently (i.e. since September 2013) they have outperformed, the broader market index; but over the past 5 years they have underperformed grossly. If you want to benefit from investment in PSU companies, you need not invest in PSU funds. You may invest in any well-performing opportunities style fund (which are diversified equity funds) with a proven track record of consistent performance and which are from fund houses that follow strong investment processes and systems.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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