The Hindu Business Line : Sheen off disinvestment

HAS the much-debated, dominant investment theme of the last 18 months — the gains linked to disinvestment of equity in public sector undertakings — fizzled out over the last two weeks? The move to postpone the disinvestment exercise in Bharat Petroleum and Hindustan Petroleum indicates that this may be so.

As, indeed, do the squabbles over the disinvestment issue, with each minister trying to protect PSUs in his turf. The classic example is the proposal to merge BSNL and MTNL — an exercise of considerable magnitude that could effectively scuttle any disinvestment plans of the merged entity for at least two years.

Yet, by no means is disinvestment a `dead' story, by any means. There may be some changes in the mode of disinvestment for certain companies. This could have implications for any gains that could come from investments pegged to this process.

Where, indeed, is disinvestment headed? And what are the implications for investments predicated on this? The events of the past fortnight provide three key pointers for investors:

Showcasing risks/returns

Investing in the anticipation of disinvestment-linked gains is a high-risk business. But the rewards can be high, as shareholders of Hindustan Zinc, CMC, VSNL, IBP and IPCL have found.

Even shareholders who acquired these shares in the secondary market at close to their yearly high prices would have got returns of 25-60 per cent had they participated in the open offer made by the successful bidder acquiring a strategic stake from the government.

But the downside can also be substantial if the exercise gets delayed or there are indications that it may not happen at all for some time to come. BPCL and HPCL are classic examples, with the stocks losing 31.2 per cent and 30.1 per cent, respectively, following the postponement by the government.

Beating fundamentals

In most PSU stocks, prices have been driven to levels way beyond what is warranted by their fundamentals. Without the element of disinvestment-linked buying, such stocks as Engineers India, BPCL, HPCL, Shipping Corporation may all trade at much lower levels.

But prices of PSU stocks are unlikely to get aligned to fundamentals as long as there is even a whiff of disinvestment is in the air. Recent moves to stall the exercise in many PSUs need not be viewed as a permanent freeze on disinvestment. More likely, this is just a pause before the process gets underway, possibly with some changes in the mode.

However, if you are investing in a PSU stock with disinvestment-linked gains in mind, you must be absolutely clear that it is not a one-way street to profits. And where the disinvestment is ruled out, the downside can indeed be steep, as prices would align with fundamentals.

Strategic sale, the key

Shareholders in CMC, VSNL, Hindustan Zinc, IBP and IPCL reaped rich gains only because of the mode of disinvestment adopted by the Government. For instance, IBP shareholders got Rs 1,551 per share as IOC acquired a 26 per cent stake in it, with the option to take 25 per cent later.

The sale of `strategic stake' — 51 per cent of the equity in one or two tranches — that would give would-be buyers control over the management was why the Government got such attractive prices. The benefit was also reaped by other shareholders as the successful bidder is required to make an open offer for 20 per cent at the same price under the SEBI Takeover Code.

Just contrast this with the sale of equity in international markets by the government. In the case of VSNL, SBI and MTNL, the GDR route fetched only market prices (beaten down, too, by interested persons ahead of the exercise).

Earlier disinvestment exercises to institutions through the 1990s also went along similar lines. The market price normally has no control element built in. This gets incorporated only in a strategic sale or a takeover situation. So, for investors who hope to make money on disinvestment, the prospects for gain almost entirely depend on the strategic sale by the Government and the attendant open offer.

Sale to public

The erstwhile Disinvestment Commission, as well as some sections of the Government, want the disinvestment to be done through sale of shares to the public so that there is a widespread shareholding. It would also ensure that private monopolies do not emerge and that assets created by taxpayers' monies are not cornered by private business interests — so go the supporting arguments.

This route has been particularly recommended for oil sector companies. But if this is done, one can comfortably forget about any disinvestment-linked gains. Offers for sale to the public would necessarily be close to the market price, or even carry a discount to it, to attract investors.

In this case, the investment would have to be based on whether the price is attractive vis-à-vis the fundamentals. There would also be other risks, such as low floating stock, that could impart high volatility to the stock prices. Nor would the Government get any value for control and, as a result, the amounts realised may be far lower compared to the few strategic sales done so far. For instance, no retail or institutional investor would have paid Rs 1,551 for an IBP share or Rs 231 for IPCL.

This itself may become a ground to criticise the exercise. In this context, it is quite likely that the Government will pursue the strategic sale route, perhaps to slow down the pace in the coveted oil sector to calm any frayed political nerves.

The way ahead

Despite the possible changes that may come about as a result of the recent opposition to divestment in the oil sector, the Government will, no doubt, go ahead with disinvestment, as such. What does this mean for PSU stocks?

For Shipping Corporation, Engineers India, Hindustan Organic, Rashtriya Chemicals and Dredging Corporation, disinvestment may still be through the strategic sale route. Stay with these stocks if you are invested.

ONGC, BHEL, IOC, Bharat Electronics and GAIL are likely to remain outside the purview of disinvestment. So any investor buying or holding these stocks would have to look at fundamentals closely.

Disinvestment exercises in BPCL and HPCL may get delayed as vested interests battle it out. But when they take place, it may be through the strategic route or else the Government may get a sharply reduced price without any value for control.

The Government would also not benefit from the keen competition among Shell, Reliance and Exxon Mobil, to name a few, to take charge of two well-established oil-refining and marketing companies. The risk in these two companies is the `if and when' factor, and the concentrated holdings by institutions that could be a downside risk if they chose to sell out.

In companies such as Neyveli Lignite, BEML, MTNL, HMT and Nalco, regional political pressures may stall the process, at least till 2003/2004, when the general elections are due.

Investors could, however, book profits in ONGC and look to re-enter at lower levels. But GAIL's petrochemiclas business may cast a shadow on its overall performance. Also, use any across-the-board rally in PSU stocks to book profits in such stocks as well as SAIL.

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