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S. Vaidya Nathan

WHILE uncertainty over the disinvestment process has taken some of the sheen off PSU stocks, nearly all of them, barring MTNL, are still in positive territory, reckoned from January 2001, when this universe of stocks was, as a whole, languishing. That was when the idea of adopting the strategic sale route started to trigger some interest in these stocks.

And in the October 2001-June 2002 period, the PSU stocks really gained ground. Strong institutional investor interest was evident in stocks such as BPCL, HPCL, Neyveli Lignite, IBP, VSNL and CMC. For most equity funds, BPCL and HPCL figure in the top ten holdings. This may well be the trend in FII portfolios as well.

The rally was across-the-board, even covering stocks where disinvestment was never really on the cards.

But this helped correct the undervaluaton in such stocks as IOC, ONGC and GAIL. ONGC has, in fact, moved up sharply, nudged also by rising crude prices, to become the largest company by market cap, moving ahead of Hindustan Lever.

Profit-booking has also been clearly evident in these stocks. A comparison of the yearly highs and current price shows that PSU stocks, with the exception of IOC, are down 12-55 per cent from their highs. Despite this decline they have shown attractive returns over the last 18 months when disinvestment has been in the news.

Profit-booking appears to be a good approach, especially when prices have run up so sharply, without any support from fundamentals. That the profit-booking was done smartly is evident from the relatively smaller declines from highs in the stocks shortlisted for divestment — Nalco, Neyveli Lignite, BPCL, HPCL, Shipping Corporation and Engineers India.

Though BPCL and HPCL are down 40 per cent off their highs, close to 78 per cent of this decline has come about in the last 15 trading days, when it became clear that disinvestment in the two was running into trouble.

Interestingly, Engineers India, Shipping Corporation and Neyveli Lignite held their ground in this period or even posted modest gains. Perhaps this is attributable to disinvestment moving ahead sooner in these companies.

The price trends also provide some valuable signals for dealing with stocks of companies where disinvestment has been completed. Not unexpectedly, the prices have become more closely aligned with the fundamentals as the disinvestments-linked gains are priced out.

As the open offer draws to a close, there is little incentive for investors to hold on. This has triggered selling pressure in these stocks.

For instance, VSNL, CMC, IBP, IPCL and Hindustan Zinc declined more rapidly once the bidding and open offer process was over. CMC, however, posted some gains over its January 2001 levels, mainly on speculation of a possible alignment with TCS.

This price trend is important for investors in PSU stocks. If the strategic sale is completed, closely evaluate two possibilities: One, the chance of your shares getting accepted in the open offer; or, two, selling the holdings in the secondary market to avoid the risk of non-acceptance.

This would depend on the floating stock. For instance, in companies such as Engineers India and Dredging Corporation, where the floating stock is less than 10 per cent, there is no risk involved of non-acceptance in the open offer.

But in cases such as IPCL (where 56 per cent of the applications were accepted), the chances of non-acceptance are high.

Or, you may end up getting only a part of your shares accepted. Such a situation may also emerge in Nalco, when the disinvestment happens.

In such cases, investors have to look at selling their entire holdings in the secondary market when the strategic sale happens.

This would ensure that they are in a situation where part of the shares are accepted and the rest have to be sold in the market at sharply lower prices (effectively limited the overall gains).

The price may be slightly lower than the open offer price but to get such a price on the entire holdings may be a better outcome for investors. Once the open offer is over, there may be only marginal gains to be had, at best.

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