PSU stocks near 52-week low as PGCIL FPO opens

MUMBAI: The plunging share prices of government owned companies serve as a warning for investors just ahead of the Power Grid (PGCIL) follow-on-offer (FPO), which opens on Tuesday. Shares of prime divestment candidates for this fiscal (FY14) such as Coal India, IOC, PGCIL, Engineers India have crashed up to 40% in the past year.

Shareholders of PSU stocks are uncomfortable buying such shares as most of them are trading at their near 52-week lows, at a time when the Sensex is scaling new peaks. The government has set an ambitious divestment target of 40,000 crore for FY14. Most of the government’s divestments concluded this year through the offer for sale (OFS) route, including FACT, Neyveli Lignite, Hindustan Copper, National Fertilizers and HMT, have seen market value erosion of up to 70%.

“It is not good market economics to sell family silver at discounted prices, which is detrimental to investor interest. The government is discovering sale price of PSU companies at lower levels; we fear this will destroy market capitalisation of PSU companies,” said Deven Choksey, managing director at KR Choksey. “My suggestion would be to fix a support price for PSU divestment, and create longer window for the sale process, say around one year. In the process, both the government and investors would be in a win-win situation.”

The PGCIL FPO price-band has been set at Rs 85-90, which is near its 52-week low, and 30% lower than its year-high of 121. IOC and Coal India divestment are next on the cards. The share prices of these companies have fallen 40% and 25%, respectively over the past year to trade near their 52-week lows.

“Many of the PSU companies have some overhang on their stocks, let’s say Coal India --investors are concerned over FSA impact on its balance sheet. And for IOC, investors are worried about the company’s big fuel subsidy burden. Thus, investor appetite for PSU shares is almost negligible,” said Vinay Khattar, head of research and vice president at Edelweiss.

The government is also planning to divest stake in Hindustan Aeronautics, BHEL and NHPC before March-end this fiscal. But investment experts suggest that the government should be focused on divesting stake in leading private companies such as ITC, L&T and Axis Bank where it holds stake through Special Undertaking of Unit Trust of India (SUTTI) as investor interest for these companies are strong.