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Budget 2021 | Govt likely to bring privatisation into focus; divestment may lead to significant re-rating of PSU stocks

Brokerages are of the view that strategic divestment may lead to significant re-rating of the public sector enterprises (PSEs) stocks, as seen during 2002.

January 28, 2021 / 12:13 PM IST

As the plans for privatisation for the financial year 2020-21 failed to materialise due to OCVID-19, the government is likely to bring the matter back to focus and Finance Minister Nirmala Sitharaman is expected
to make major announcements in this regard in the Union Budget 2021.

Brokerages are of the view that strategic divestment may lead to significant re-rating of the public sector enterprises (PSEs) stocks, as seen during 2002.

Media reports suggest that the government has received suggestions from economists who have pushed for privatisation in the upcoming budget, among other reforms.

As pointed by the brokerage firm Antique Stock Broking, in the last Union Budget, the government had set an ambitious target of strategic divestment to the tune of Rs 2.1 lakh crore and subsequently in May 2020, the
the government came up with a new coherent public sector enterprise policy which stated that there will be a maximum of four public sector companies in strategic sectors and will eventually privatise in other segments.

"No significant progress was made in FY21, nonetheless we are hopeful that strategic divestment may gain steam in FY22 as government require divestment receipt in order to fund growth and unlock true asset value," Antique said.

Read more: Government to take another shot at privatisation

Strategic divestment will be a strong boost to PSU stocks that have a significant valuation comfort.

Brokerage firm Antique pointed out that in the year 2002, the entire public sector enterprise as a basket was re-rated (nearly 70 percent outperformance) as strategic divestment took place.

"Multiple strategic disinvestments were undertaken - like Hindustan Zinc, IBP, VSNL, IPCL, etc. by NDA government, leading to significant asset value unlocking, thereby re-rating the entire PSU basket," said Antique.

Antique is positive on the sector as the sector is at a multi-year low valuation.

"Along with the divestment trigger, we are constructive on PSE basket because of attractive valuation," said Antique.

"Significant underperformance of PSEs during the last decade have shrunk PSE share in India market cap from about 31 percent in 2009 to the current about 8 percent levels. The valuation are now at historic discount levels relative to its own history and Sensex," Antique said.


Expectations are running high from the government to deliver a growth-oriented budget especially after the Finance Minister suggested that she will deliver a budget seen once in a century.

However, there are high risks that any disappointment from the Budget will have a strong negative impact on the market.

"Any disappointment in form of higher fiscal consolidation (spending cut), imposing higher long-term capital gain tax (currently at 10 percent) or tax rate on individuals would be construed negatively especially at the time of current elevated valuation," said Antique Stock Broking.

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Nishant Kumar
first published: Jan 28, 2021 12:13 pm