Indian disinvestment plans have largely been a case of over-promising and under-delivering, with the fundraising target met only twice in the past 12 years.
Even so, this year’s miss marks a new low. The government has raised ₹13,844 crore by selling stakes in public sector units (PSUs) this fiscal year, a fraction of its ₹2.1 trillion targets. The amount is also a record low when seen as a proportion of the total equity fundraising by Indian companies.
Between April and December this fiscal, Indian companies raised over ₹1.7 trillion by selling equity in the primary market, and disinvestments this year amount to only 8% of that. In the preceding 10 years, the median for this ratio stood at 49%.
Some market experts say judging the government on disinvestment in a pandemic year is unfair—there was a delay in due diligence in some privatization deals. While this is true, the disconnect of PSU stocks with the rest of the market can’t be ignored. A finance ministry official told Mint last month that a key reason the Department of Investment and Public Asset Management has dithered on stake sales was the low valuation of PSU stocks.
“If you compare (PSU stocks) with their value one year ago or their book value, they are not doing well. This is limiting disinvestment options,” the official said seeking anonymity.
The fact that PSU stocks are undervalued relative to book value, and that, too, when markets are at record highs, shows there is something fundamentally wrong with these firms. In the past 10 years, the BSE PSU index has fallen by about 30% in value, while the BSE 500 index has risen by about 150%. Analysts at Jefferies India Pvt. Ltd said in a report on 17 December that the discount of PSU stocks relative to the market has progressively increased since 2018.
While the finance ministry is waiting for the right valuations, the problem may well be that it is waiting too long to privatize, and valuations are eroding further in the process.
“PSU stocks have declined even in this market, and some of them are poorly managed, with excessive government interference. Even if they are available at a discounted valuation, investors who are looking at profit maximization are unlikely to be enthused about buying stakes in PSUs that have a reputation of being difficult to turn around,” said an analyst with a multinational brokerage house, requesting anonymity. Policy changes sometimes hurt, too. A case in point is Concor, where Indian Railways hiked the land licence fee from a variable fee linked to its volumes to a fixed fee linked to the land’s market value. This led to a huge decline in the company’s shares, which was alarming, considering that a Concor stake sale was being talked about around the same time.
In the case of Steel Authority of India Ltd, which trades below book value, problems include high staff cost, apart from compulsions to serve the state’s interests, analysts say. Further, its product mix remains skewed toward long products used in construction, which are less profitable. Analysts point to an array of factors that need to be fixed for PSU disinvestments to yield the desired results. “If they want to meet this massive target, then it has to be an outright sale, which is privatization. Investors, especially private equity, are not interested in a piecemeal sale,” said an analyst at a multinational brokerage. Piecemeal sales also result in low valuations. As the saying goes: The business of the government is not to be in business.
Vikas Khemani, founder, Carnelian Asset Management, said, “The due diligence process when divesting a public asset is long. In that context, the disinvestment target set seems to be ambitious.” He said, since the process is stringent, the reality of time taken to complete the divestment should be factored-in when setting target. “Given the stringency of the process, for disinvestment to be successful, many things have to fall into place,” he said.
It should be noted that the FY21 disinvestment target is almost double that of the previous year. Apart from the Life Insurance Corp. IPO, Bharat Petroleum Corp. Ltd and Air India are among key disinvestment candidates. So far, none of these have materialized. With just three months left, it is unrealistic to expect much on this front.
While things should look up next fiscal, with some deals expected to materialize, the massive erosion in value over the years should be a wake-up call to maximize value of government ownership in PSUs.