PSU stocks set to yield more amid divestment

With the new financial year kicking in and the equity markets showing signs of stability, the government is expected to soon initiate its divestment programme with renewed vigour.

Finance Minister Pranab Mukherjee has already pegged the divestment target at Rs 40,000 crore (Rs 400 billion) for the current financial year.

Market experts say this could be the right time for investors to look at stocks of public sector undertakings (PSUs) which would rally on the back of the government's ambitious pipeline.

With both initial public offers (IPOs) and follow-on public offers (FPOs) lined up, a positive rub-off effect on already listed PSUs cannot be ruled out, they say.

Interestingly, if the recent data is anything to go by, then the rally in PSU stocks has already begun.

In the last one month, when the Sensex gained a little over 6 per cent, there have been many PSU stocks that have outperformed the benchmark index by a wide margin.

Stocks like BPCL, Oil India, Chennai Petroleum, Coal India, BEML, GMDC, HPCL, MTNL, Mangalore Refinery & Petroleum, Neyveli Lignite Corporation, NHPC, NMDC and ONGC all outpaced the benchmark 30-share Sensex. Most of the public sector banks also fared better than the Sensex in the last one month.

The coming months would see the government diluting its stake in big companies including Power Finance Corporation, ONGC, SAIL and Hindustan Copper.

The government approval is already in place for these four issuances. Apart from these, reports suggest the government would also off-load a part of its equity in entities such as IOC, National Buildings Construction Corporation, MMTC and Rashtriya Ispat Nigam.

"The pricing is important as investors look at the post-listing gains," says Mayank Shah, business head, Edelweiss Financial Advisors.

"We had a couple of instances last year when the pricing was not good and stocks did not react. There is enough liquidity this time and we are seeing value buying in stocks with the right valuation," he says.

The performance of the BSE PSU index, however, is almost on a par with that of the benchmark Sensex if one compares the 1-month or 3-month movement.

A longer time horizon, however, changes the picture completely with the Sensex outperforming the PSU index by a wide margin.

Experts, however, say the index comparison is not the best way to judge the returns of the state-owned companies as the PSU index comprises more than 60 constituents.

A section of analysts also feels that while the new financial year has kicked in, the government will wait for some time before hitting the market with divestment issues.

"It will happen when the markets attain a fair amount of stability, so my sense is the first three months will see some issuances from the private sector space and maybe in the second half of the current calendar year, divestments will start to happen. It (divestment) is positive in terms of direction and speed at which it happens.

It is just that the onus is a lot more on the government this time around since it will be really driven by the value at which the issue opens," says Nikhil Vora, managing director, IDFC Institutional Equities.

A lot of divestment that happens from here on will depend on policy decisions, which have been at a standstill, he added.

The recent past has also seen foreign institutional investors (FIIs) taking an aggressively bullish stance on the Indian markets.

After remaining net sellers in January and February, FIIs have bought Indian shares worth nearly Rs 6,900 crore (Rs69 billion).