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Wanted some big hits: Narendra Modi should go for quick disinvestment of 10 large PSE

Tuesday, 27 May 2014 - 6:02pm IST | Place: Mumbai | Agency: Zee Research Group
  • RNA Research & Archives

Having received a decisive mandate, the world expects Prime Minister Narendra Modi to shun singles and doubles to focus on some lusty big hits. But does Modi have the legroom to do so?

While pundits slog it out over how much space the outgoing government has afforded the new prime minister, a clear window of opportunity exists for him in long overdue divestment of the public sector enterprises.

The unprecedented buoyancy in stock market offers the new government the immediate opportunity to actually score big gains.

The Indian stock markets are in robust state as foreign institutional investors (FIIs) have been pumping money since the time Modi was declared the BJP’s prime ministerial candidate. The clear verdict has only bolstered the prospects of a sustained bull run.

This makes a strong case for better realisations for the government from stake sale in public sector enterprises (PSEs). The new government can easily raise an amount ranging from Rs 65,604 crore to Rs 1.13 lakh crore if they divest up to 5-10% stake in the top 10 PSEs (in terms of market capitalisation).

This money can either be utilized in reviving the economic growth or bridging the revenue shortfall.

Zee Research Group (ZRG) has selected top-10 most valued public sector undertaking (PSU) companies incorporated in S&P BSE PSU Index for the analysis. ZRG has created three scenarios where government might divest 1) 5% stake, 2) 10% stake, 3) mix of 5 and 10% stake.

The possible list of candidates also includes banking heavyweights like State Bank of India (SBI) and Bank of Baroda. As per the recent report of Reserve Bank of India (RBI) panel, the government should cut its holding in public sector banks to below 50%. However, the ZRG analysis provides for the disinvested entity to be yet a government company with it holding more than 51% stake post the sale.

Interestingly, since 13 September, 2013, while the Sensex has generated returns of 25%, average returns generated by the possible candidates are 57%.

In scenario 1, the top 10 PSUs in which the government can divest 5% stake are: ONGC, Coal India, SBI, Bank of India, NTPC, Indian Oil Corporation, NMDC, Power Grid Corporation, Bharat Heavy Electricals Ltd, GAIL (India) Ltd and Bank of Baroda (BOB). If the said stake sale happens in the possible candidates at the current market price (CMP) then the government may fetch Rs 65,604 crore.

Similarly, in scenario 2, the top 10 PSUs in which the government can divest 10% stake are: ONGC, Coal India, NTPC, Indian Oil Corporation, NMDC, Bharat Heavy Electricals Ltd, Power Finance Corporation, Oil India, SAIL, and REC. If the mentioned stake sale happens at CMP then the government may collect Rs 1.10 lakh crore.

Likewise, in scenario 3, the top 10 PSUs in which the government can divest either 5% or 10% stake are: ONGC, Coal India, SBI (5%), NTPC, Indian Oil Corporation, NMDC, Bharat Heavy Electricals Ltd, Power Grid (5%), GAIL (5%), and BOB (5%). If the stake sale happens at CMP then the government may get Rs 1.13 lakh crore.

Historically, the disinvestment target announced in the Budget has been consistently missed by the respective ministers. For instance, during the UPA-II regime, barring 2009-10 (when no target was fixed), targets were set up for all the remaining four financial years. However, these targets were never met.

In the last fiscal 2013-14, the government could not meet its disinvestment target owing to the weak economic scenario. The original estimate announced in the budget was Rs 40,000 crore but it could realise only Rs 15,819.45 crore.

In the last few years, it has been witnessed that stake sales in PSUs have been a big source of revenue for the government. Corroborating the view, a CLSA report stated, “During the previous NDA rule (1998-2004), total disinvestment proceeds were around US$5.5bn for the Government of India, including wholesale disposal of PSUs to private parties. Since then, over the last 10 years, total disinvestment has been around US$21bn, though most of it via the stake sale in equity markets.”

“An NDA government under Mr Modi will follow a different approach as he has stated that he believes PSU performance can be improved by empowering the management. Successful examples of the same are found in Gujarat state PSUs, which have the highest profitability across India. A potential turnaround for central government PSUs could work wonders for some of them. PSU banks also stand to benefit if the banks are allowed to work without political interference and are made more efficient through technology upgradation,” CLSA added.

Exhibit 1: Amount expected to be raised by the government if it divests 5% stake

 






S.No.

Company

CMP (Rs)

Present stake of Government in %

Outstanding shares

Money raised (Rs crore)

1

ONGC

405.25

68.94

8555490120

17335.56

2

Coal India

400.75

89.65

6316364400

12656.42

3

SBI

2699.8

58.6

746573092

10077.99

4

NTPC

156.35

75

8245464400

6445.89

5

Indian Oil Corp

370.65

68.57

2427952482

4499.60

6

NMDC

177.05

80

3964716000

3509.76

7

BHEL

259.4

63.06

2447600000

3174.54

8

Power Grid Corp

128

57.9

5231589648

3348.22

9

Gail India

410.05

56.11

1268477400

2600.70

10

BOB

910.8

56.26

429415087

1955.56

 

65604.23

 

Exhibit 2: Amount expected to be raised by the government if it divests 10% stake

 






S.No.

Company

CMP (Rs)

Present stake of Government in %

No. of outstanding shares

Money raised (Rs crore)

1

ONGC

405.25

68.94

8555490120

34671.12

2

Coal India

400.75

89.65

6316364400

25312.83

3

NTPC

156.35

75

8245464400

12891.78

4

Indian Oil Corp

370.65

68.57

2427952482

8999.21

5

NMDC

177.05

80

3964716000

7019.53

6

BHEL

259.4

63.06

2447600000

6349.07

7

Power Finance

308.05

72.8

1320040704

4066.39

8

OIL INDIA

608.15

67.64

601135955.0

3655.81

9

SAIL

94.8

80

4130525289

3915.74

10

REC

343.85

65.64

987459000

3395.38

 

110276.86

 

Exhibit 3: Amount expected to be raised by the government if it divests either 5 or 10% stake

 







S.No.

Company

CMP (Rs)

Present stake of Government in %

Stake Divested

Outstanding shares

Money raised (Rs crore)

1

ONGC

405.25

68.94

10%

8555490120

34671.12

2

Coal India

400.75

89.65

10%

6316364400

25312.83

3

SBI

2699.8

58.6

5%

746573092

10077.99

4

NTPC

156.35

75

10%

8245464400

12891.78

5

Indian Oil Corp

370.65

68.57

10%

2427952482

8999.21

6

NMDC

177.05

80

10%

3964716000

7019.53

7

BHEL

259.4

63.06

10%

2447600000

6349.07

8

Power Grid Corp

128

57.9

5%

5231589648

3348.22

9

Gail India

410.05

56.11

5%

1268477400

2600.70

10

BOB

910.8

56.26

5%

429415087

1955.56

 

113226.01

 

 

Exhibit 4: Stock price movement of PSU companies

 









Scrip

13-Sep (Rs)

12-May (Rs)

16-May (Rs)

26-May (Rs)

Returns b/w 13 Sep- 12 May 2014

Returns b/w 12 -16 May

Returns b/w 16-26 May

Returns b/w 13 Sep- 26 May 2014

ONGC

282.75

358.4

384.95

405.25

26.8%

7.4%

5.3%

43.3%

Coal India

293.2

330.8

345.65

400.75

12.8%

4.5%

15.9%

36.7%

SBI

1662.95

2243.75

2414.3

2699.8

34.9%

7.6%

11.8%

62.4%

NTPC

140.95

121.3

131.85

156.35

-13.9%

8.7%

18.6%

10.9%

Indian Oil Corp

232.65

302.25

326.4

370.65

29.9%

8.0%

13.6%

59.3%

NMDC

124.8

151.9

161.65

177.05

21.7%

6.4%

9.5%

41.9%

BHEL

142.35

198.45

229.4

259.4

39.4%

15.6%

13.1%

82.2%

Power Grid Corp

99.8

111.45

119.35

128

11.7%

7.1%

7.2%

28.3%

Gail India

313.15

383.05

409.4

410.05

22.3%

6.9%

0.2%

30.9%

BOB

530.6

839.35

934.55

910.8

58.2%

11.3%

-2.5%

71.7%

Power Finance

130.9

211.5

257.65

308.05

61.6%

21.8%

19.6%

135.3%

OIL INDIA

469.7

510.3

563.15

608.15

8.6%

10.4%

8.0%

29.5%

SAIL

49.15

69.15

78.15

94.8

40.7%

13.0%

21.3%

92.9%

REC

198

253.4

290.6

343.85

28.0%

14.7%

18.3%

73.7%

 

 




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