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The Indian government has kickstarted its divestment program by with a 5% sale of Steel Authority of India Ltd (SAIL). The move is expected to help the government raise Rs 1,700 crore. The current fiscal divestment target set by the government is Rs 58,425 crore. Among other public sector companies that are up for divestment are Coal India, ONGC, NHPC, Power Finance Corporation (PFC), Rural Electrification (REC),Hindustan Zinc and Balco.
However, the government seems to have started off on the wrong foot.
First, SAIL is not the most sought after PSU in the market. The stock has been an underperformer: against an almost 40% rise in the broader index, SAIL has moved up by only 22%. In fact, the stock has fallen by 16.5% over the last three months. Clearly, buoyancy in the market has not touched SAIL.
If government’s intention of divesting with SAIL was to test waters for retail penetration for future divestments, then it has made a bad judgment call.
Only two months ago SAIL touched a low of Rs 66.55. Government now plans to raise money from the market at a floor price of Rs 83. Retail investors will of course be given a discount of 5%.
Should retail investors participate in such a case where the price of the stock has already run up before divestment? In the past, private companies have been blamed for boosting their share price before they intended to raise money. The government, too, seems to have fallen into the same category.
Prithvi Haldea, MD, Prime Database in an interview with CNBC had said that divestment cannot have just one single objective of meeting the fiscal deficit. “Divestment has to be viewed in the Indian context from the point of view of enlarging capital market, deepening the market, getting more retail money into the market but we have lost out on those fronts,” he said.
Haldea had in a presentation earlier said that FPOs should be at a significant discount to the market price. Wealth created by public enterprises through domestic public resources should rightfully be shared only with the public, he argued, pointing out that government/PSUs should not be concerned about lower valuations since it was public money going back to the public.
In the case of SAIL, fundamentals do not even support the current pricing. Research firm Macquarie has a price target of Rs 63 per shares for SAIL. Even on a best case basis, where steel margins go through the roof, SAIL should be trading at Rs 90. That is a small return from a stock when the market is going wild.
For a retail investor who intends to participate in a divestment story, the 5% discount should not be the only criteria. If the stock has been trading at a lower price just before the issue, it is likely that it may revisit the price post higher liquidity in the market. After all this is not a fresh issue and shares are available in the market.
An FPO makes little sense for a retail investor unless the discount is high, probably somewhere close to the recent low. But, for institution players who buys in bulk and can impact the share price by the purchases, it makes sense to buy the share at one price.
