Tuesday, February 2, 2010


PSU is still an evolving theme in the market. The process of disinvestment started in the early 1990s. The stocks from this space did however; trail the broad market in the 1990s. They have started to find recognition and valuation that justifies their strengths, only in the recent past. If the most visible themes of the last two decades have been IT & telecom respectively, PSU as an asset class has been the silent performer. They are set to emerge as an even bigger part of the market in the years ahead with potential for value creation in excess of what is offered by the broad market over a five-year plus period.

Government plans to raise over Rs 25,000 crore in 2009-10, not only to reduce fiscal deficit but also for expansion of public sector enterprises. The government holdings in listed public sector companies are worth Rs 8.80 lakh crore and if the government dilutes its stakes to 51% in these listed companies, it could lead to an inflow of Rs3 lakh crore at current market prices. A dilution of 10% stake in top 10 PSUs can bring in a whopping Rs 85,000 crore. Thus, the government could earn a substantial sum by diluting its stake in just listed PSUs to 51%

Key Facts:

Since disinvestment started in 1991 PSUs have gained a sizeable and growing share of the Indian market. The Government of India, which has about a stake of about 80% in listed PSUs, is today the owner of 25% of the market capitalisation of the equity market in India. It has reaped gains that are higher than the broad market since disinvestment started in 1991 despite the low prices in the initial few rounds and even as recently as in
the divestment in Maruti and Hindustan Zinc, a few years ago. PSUs today account for about 30% of the market cap on the National Stock Exchange, which has about 1330 listed stocks and counting. To evaluate how PSUs had performed, an analysis of price trends was carried out in 48 PSU stocks that were listed. In the almost 10-year period, this PSU universe has delivered a compounded annual rate of growth (CARG) in returns of 24.2 per cent. During this period, 621 stocks (private players) that have been listed on the NSE for a corresponding period have offered CARG in returns of 13.5 per cent. These numbers shows that PSU stocks have outpaced not just the broad market, but private sector peers, too.

Why Divestment?
1) Government-funded stimulus measures and a soaring subsidy bill have swelled the fiscal deficit. With the economic slowdown impacting revenue receipts, divestment is clearly one route to raising funds to improve the fiscal picture. The fiscal deficit for the year 2008-09 at a whopping Rs 3,30,000 crore, is 21% of the total market capitalisation of the BSE PSU index. Though proceeds of divestment since 2007 have gone into the ‘National Investment Fund’, expectations are that divestment proceeds will now come back into the Budget and help fill the fiscal deficit.

2) IPOs from unlisted government owned companies could well help revive the IPO market and boost the stock market. Both the Congress manifesto and the interim budget emphasised the need for divestment. PSUs where the government stake is much higher than 51% may be the ones where stake sales will be pushed through first

To read the full report: PSU DISINVESTMENT