Govt to sell stake in companies held under SU-UTI. How should investors react?

Desperate for money, the government is using all possible options to raise money. Last week, it decided to sell the remaining stake in companies held under the Special Undertaking of UTI or SU-UTI. The government expects to raise around Rs 22,000 crore by selling its 7.93% stake in ITC and 4.6% in Axis Bank. Since SU-UTI stake in the stocks is big, this event is going to put pressure on these two counters. SU-UTI also has stake in other companies such as Gujarat Pipavav Port (1.01%), but it is not very big.

How should investors react to such events? A stake sale like this will not impact the fundamentals of these companies. But experts say that any technical weakness triggered by the offloading can be a buying opportunity. However, investors should consider the fundamentals of the company and also the sector prospects before getting in. For example, ITC is one of the strongest FMCG companies and has strong cash flows. Though there will be disturbance to its cigarette sales due to the Covid pandemic, this is going to be a short-term affair. The impact is expected to last for about one year. Since the SU-UTI holding in ITC is high, the counter has already reacted badly to this news and has underperformed the Sensex by 8% over the past three days.

SU-UTI stocks have slumped following the news

Table sorted on the basis of SU-UTI holding in %
Compiled by ETIG Database

“ITC is a good stock with high dividend yield and quoting at reasonable price. After the recent correction, it has become more attractive,” says Naveen Kulkarni, CIO, Axis Securities.

Though Axis Bank is also fundamentally strong, experts advise you to be a bit cautious due to many reasons. First, the negative reaction in this counter was muted because the stake by SU-UTI here is smaller than that of ITC. Second, the lockdown induced problems are going to hit all banks in the coming quarters and Axis Bank won’t be spared from that. In other words, the sector prospects looks hazy now. “We are neutral on Axis Bank now because it is a play on the economy. If the 3-month loan moratorium gets extended, it will put pressure on all banks. So, we are not very excited on the banks right now,” says Amit Khurana, Head of Research and Equities, Dolat Capital.