Friday, January 8, 2010


On account of global recessionary trends, India witnessed slowdown in its economy which resulted in all time high 16 – year high fiscal deficit of 6.8% which by any standard is unsustainable. The government in order to overcome economic slowdown and ensure that the economic growth process is not derailed growth during it introduced three stimulus packages which resulted in fiscal deficit of 6.8% of GDP.

Economy has started improving on account of government’s stimulus package. We expect, stimulus package would be withdrawn in a phased manner in tune with the gradual improvement of Indian economy.

It is encouraging to note that the government made its intentions clear to roll back the fiscal deficit to 5.5% from 6.8% of GDP in FY 11 and further down to 4% in FY 12. However government needs revenues to overcome these fiscal slippages and increasing the rates of indirect and direct taxes prematurely would defeat the very purpose of stimulus package. Government was left with the onerous task of maintaining a delicate balance between maintaining the growth momentum and ensuring rigorous fiscal discipline to bridge the fiscal deficit at acceptable levels within the shortest possible time span. Under the circumstances divestment of PSU’s was the only panacea to the abovementioned dilemma.

PSU Disinvestment inevitable…

The Cabinet Committee on Economic Affairs decided that the government will lower its stake in all listed public sector enterprises (PSEs) to atleast 90%. Government has already initiated this process by divesting 5% stake in companies like NHPC, Oil India which fetched ~Rs.42,600 mn. There are ~13 companies in which government stake is in excess of 90%. Disinvestment in these companies could fetch ~Rs. 280,000 mn which are shown in report

Further, disinvestment by the government would lead to significant re – rating of PSU companies. Local indices and MSCI India are on free float basis, where PSUs score poorly- e.g. PSU weightage in Nifty by Market Capitalisation is ~29%while actual weightage is only 14.7% due to low free float. As a result global fund managers may have to increase their weightage in PSUs. In general, India may have a poor perception of PSU companies but these stock’s have outperformed the Sensex over the last 1,3 and 10 years.

2010 can expect huge issuances from Government of India. As India is transiting from US$1 trn economy to US$ 2 trn, it has a digestable appetite to absorb these massive investments mainly due to its 38 % savings rate.

Companies in the PSU basket have huge cashable, monetizable assets like for eg. a land bank. Government is increasingly consenting to monetize these land banks.

PSU’s a wealth generating story in the past…
PSUs disinvestment has created value for investors in the long run. If we recall the 1st time that PSUs got listed in 1993 – 94, it was amazing to see the bargains that one got in companies like CMC, BHEL etc.

To read the full report: PSU DISINVESTMENT