• FEBRUARY 18, 2002

Are PSU's still undervalued?

PSU's have had a dream run over the last fortnight. Some of the stocks which did not feature in investors' portfolios are now suddenly the market darlings. The divestment efforts of Mr. Shourie has certainly unlocked huge values both for the government and retail public. But are PSU's still undervalued? Yes and No....

Over the years, markets have generally given lower P/E multiples to PSU stocks due to perception of them being inefficient over their private peers, slow decision making, overstaffing, so on and so forth. Not to mention the concerns over bureaucratic interventions. However, there are some classic examples of efficiently managed PSU's like Corporation Bank, which have been given a lower valuation only due to the perception of it being a government owned company. The rerating in these stocks obviously means that the markets believe that there is lot of value to be unlocked from privatisation.

PSU Valuation- A reality Check
ParticularsLast Closing (Rs.)As on 31/1/02% change in the last fortnightP/E (Current)*P/E (As on 31/1/02)
Concor27117059.4% 6.8 4.3
ONGC23214658.9% 5.9 3.7
MTNL17411551.3% 7.9 5.2
HPCL24917443.1% 13.8 9.7
BPCL30621542.3% 14.4 10.1
Corporation Bank14910541.9% 5.8 4.1
IPCL856041.7% 21.3 15.0
IOC18813539.3% 7.2 5.2
BHEL19314830.4% 35.1 26.9
Hindustan Zinc292326.1% 11.2 8.8
Gas Authority856825.0% 6.3 5.1
SAIL6520.0% (1.0)-0.8

However, what is concerning is that the rally is seen across the board. Sure, some of the divestments bids offlate have come at a large premium to the market price. However, one also needs to understand that the market price would not necessarily be aligned to the bid price, as has been proven in the case of IBP. The markets have been smart in putting aside the aggressive benchmark for IBP given by IOC. As against the bid price of Rs 1,552 markets seem to be valuing the stock around Rs 180-200. Read more on that. The only conclusion we would like to draw over here is to ensure fundamental buying reasons before you jump on to the PSU bandwagon.

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