Retail investors should be selective about investing in public sector stocks.
The government’s keenness to sell shares in public sector units (PSUs) should be music to the ears of many investors.
According to the government’s plans, 60 PSUs will issue shares through initial public offerings (IPOs) or follow-on public offers (FPOs). Some mega issues of unlisted companies that investors can expect include from Bharat Sanchar Nigam Ltd, Sutlej Jal Vidyut Nigam Ltd and Coal India.
| CAUTIOUS OPTIMISM | |||
| Companies* | Date | 52-Week High Price (Rs) | Current Price** |
| Bharat Electron | Jan 15 ‘10 | 2,170.00 | 1,934.45 |
| Container Corp | Jan 15 ‘10 | 1,485.00 | 1,190.05 |
| BEML | Jan 19 ‘10 | 1,275.00 | 1,106.75 |
| Hind Copper | Jan 20 ‘10 | 656.95 | 579.95 |
| NMDC | Jan 19 ‘10 | 571.80 | 483.15 |
| GAIL | Jan 19 ‘10 | 449.40 | 398.70 |
| Power Finance | Jan 15 ‘10 | 284.90 | 254.00 |
| Rural Elect Corp | Jan 19 ‘10 | 274.50 | 237.80 |
| Shipping Corp | Jan 19 ‘10 | 181.90 | 153.15 |
| Neyveli Lignite | Jan 19 ‘10 | 177.70 | 149.95 |
| GMDC | Jan 19 ‘10 | 187.70 | 148.35 |
| * Top 10 PSU companies in Group A by share price, excluding banks; ** As on February 2, 2010; Source: BS Research Bureau | |||
Also, the government plans to pare down its holdings in listed entities such as National Thermal Power Corporation, Rural Electrification Corporation and National Mineral Development Corporation (NMDC).
No wonder fund houses are planning to launch PSU-oriented schemes. Sundaram BNP Paribas PSU Opportunities and Religare PSU Equity have already been launched. Market sources said SBI Mutual Fund could be planning a similar scheme.
“PSUs have the potential to give high returns at least for the next three-four years,” said J Venkatesan, fund manager of the newly-launched PSU Opportunities Scheme by Sundaram BNP Paribas. He said divestment would give these companies better operational flexibility and increase accountability. It could lead to re-rating of these stocks, he said.
“At present, this asset class has a valuation gap compared with the private sector. This will narrow as operational parameters of PSU companies improve,” said Venkatesan.
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The good news does not end there. PSUs today account for around 30 per cent of the overall market capitalisation of the Bombay Stock Exchange. Market experts expect this to go up to 40-45 per cent in the next two-three years.
All these factors make PSU stocks or schemes ideal investments. “These are quality companies in sectors that are core to India’s growth story,” said an investment expert, explaining that they are backed by the government and so unlikely to go bust in the near future. Also, many of them have huge order books and are known to pay high dividends.
However, the positives come with a word of caution from experts. For one, investors looking for listing gains should avoid these stocks. Given that the markets are in an uncertain zone, many of these stocks may not list at a big premium. Ideally, look at these stocks with a long-term perspective, at least two-three years.
Further, experts are worried about valuations. “Looking at the price the government has fixed for NTPC’s share sale, I think retail investor should stay away from PSU companies. It clearly shows that the government is planning the sale based on market prices and not real valuations. The share price for the FPO is not justified. There is a discount for employees but not for small investors,” said SP Tulsian, an investment consultant. He cites the example of NHPC and Oil India. After losing money in NHPC’s IPO, retail investors preferred to stay away from the Oil India issue.
Meanwhile, the government’s keen approach to divestment has led to a huge rally in PSU stocks. Just a couple of weeks ago, the PSU index hit its 52-week high. In fact, it has outperformed the Sensex in the last one year. While Sensex’s returned 78 per cent, the PSU index returned 88 per cent.
Though there has been some correction recently, experts suggest caution. “Small investors will see better buying opportunities in the near future,” said Anand Tandon, director, equities, Brics Securities.
Some experts say NMDC is an example of stretched valuations. “The current buying in NMDC has made it the most expensive mining company in the world. International mining giants such as BHP Billiton and Rio Tinto are cheaper than the Indian PSU,” said a fund manager.
The government’s abnormally-high holding in these companies has also led to a sharp spike in their share prices. “The demand for stocks outstrips the supply and many people are willing to pay more to get whatever little is available,” said a fund manager.
The government holds 98.38 per cent in NMDC. Instead, an investor can look at a good private sector company in the same sector, say experts. “For instance, an investor looking to buy power sector stocks can look at Tata Power and CESC,” said an investment advisor.
Mutual fund investors should invest only 10 per cent of their portfolio in these schemes. “These funds should comprise around 10 per cent of the portfolio as they are thematic funds. They invest in select stocks and the risk involved is higher,” said Chintamani Dagade, senior research analyst at Morningstar (India).