Aggressive divestment drive triggers doubts on the fate of PSU stocks

Analysts suggest investors should focus on a crucial question: whether the rally in a particular PSU stock is fundamentally driven or merely a result of liquidity.

A 12 percent correction in the SJVN counter after the government announced its decision to divest stakes at a deep discount to market price has raised concerns among investors about a potential correction in other public sector companies.

Investor worries about the government going ahead aggressively with divestments at a discount to market price has caused stocks of state-run companies to take a beating on the bourses. The NSE CPSE index, which constitutes central public sector enterprises, was trading 1.68 percent down on September 22. The index has been the best performer this year with a gain of 36 percent.

On September 20, the government announced its decision to sell 4.95 percent in SJVN at Rs 69, which was  15.59 percent lower than the prevailing price on September 20. Currently the stock trades at Rs 71.15 per share, which is 0.03 percent higher than the divestment price.

Also Read: SJVN crashes by 9% as government launches OFS to sell 2.46% equity at heavy discount

The question: should investors really place faith in PSU stocks when the government is offloading stake at a heavy discount?

A recent note from the foreign brokerage firm Jefferies stated, "PSU stocks are back in the limelight with the recent rally, potentially pressuring the government for disinvestment in the run-up to the 2023 state elections and the 2024 general elections."

"The heavy election calendar may exert pressure on the government to boost social spending, including schemes to bolster annual transfers to farmers, expand health insurance, and provide interest subsidies on home loans, among others. To meet rising expenses, a sharp PSU rally increases the chances of disinvestment in the near term," the brokerage firm noted in a statement by Mahesh Nandurkar, the Managing Director and Head of Research at Jefferies.

Also Read: Institutional buyers put Rs 1,450 crore bids for SJVN OFS, stock falls 13% on BSE

Sneha Poddar, AVP, Fundamental Research, Broking and Distribution of Motilal Oswal Financial Services Ltd, stated that, “Government of India had set a divestment target of Rs 51,000 crore for FY24, which seems a little difficult to achieve as planned major stake sales are facing challenges. So, the government has priced SJVN OFS aggressively in order to close a few divestment targets before the year end.”

Despite the aggressive pricing for disinvestments, which may mount pressure on stocks prices, experts said this will only be temporary. Poddar emphasised that investors should not lose faith in PSU stocks as they are well-positioned to capitalise on the significant opportunities arising from the opening up of the economy. Increased government capital expenditure across various sectors, combined with a push for indigenisation, has bolstered the order books of PSUs, ensuring robust revenue visibility.

“The primary challenge now lies in effectively executing these orders. Furthermore, PSU stocks remain relatively under-owned and offer substantial value, despite the sharp run-up in their share prices. Valuations continue to be favourable, offering a favourable risk-reward profile,” stated Sneha Poddar.

Reason for rally

Sanjeev Hota, Head of Research at Sharekhan by BNP Paribas, emphasised that this (selling at discount to market price) is not an unusual occurrence, as the government typically monetises its stake in PSU stocks, given its substantial holdings. "Usually, from the road show conducted prior to the offer for sale, the government gauges the price at which institutions would find valuations justifiable."

Looking ahead, he advised investors to focus on a crucial question: whether the rally in a particular PSU stock is fundamentally driven or merely a result of liquidity. Over the past year, PSU stocks have surged two to three times their historical prices, prompting investors to scrutinise whether the price growth and valuations are underpinned by the company's fundamentals.

“The market is increasingly recognising that these government-backed companies possess fundamental strength, with business visibility being evident in most of these firms, driving the rally and market valuations,” added Hota.

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