Strategic sale of PSUs can provide good wealth creation opportunity

The government has missed the divestment target for sixth year in row in FY2016. It managed to garner just Rs 13,300 crore so far in FY2016 as against the original target of Rs 69,500 crore. Now the government has lowered the divestment target to Rs 36,000 crore and expects to garner additionally Rs 20,500 crore through strategic sale of central public sector enterprises (CPSEs) in FY2017. The government has also proposed to leverage assets like land, manufacturing units, etc., belonging to CPSEs.

The government is keen to consolidate the existing CPS banks by merging the weaker ones with the stronger banks rather than selling them. There are few financial services companies, but time is not ripe for the government to sell them due to their suppressed valuations. Excluding the banks and financial services companies, then there are around 40 CPSEs which are listed in the country. It is most unlikely that the government will divest CPSEs of defense and oil & gas sectors, which are of strategic interests. Then there are many CPSEs perennially making losses – even if their assets like real estate are sold out, the proceeds may not be enough to reward the shareholders after paying off the debts and dues to the employees. Steel, copper and shipping companies are also going through very tough business environment due to global deflationary pressures and hence, any strategic sale of these businesses is likely to be delayed beyond a couple of years. The failure of two consecutive monsoons has also made it quite unattractive for the private entrepreneurs to acquire CPSEs engaged in the manufacture of fertilizers at present.

Thus, the choice for the possible strategic sale of CPSEs is limited to companies engaged in the businesses like logistics, trading, minerals and dredging.

In early 2000, the government opted for strategic sale of Hindustan Zinc when its total market cap was around Rs 1,700 crore. After selling this profitable CPSE to a private management, the market cap of this company jumped 43-fold to around Rs 73,000 crore now. The government still retains 29.5% stake in this company as a public shareholder and the value of this minority shareholding is alone worth Rs 21,000 crore now.

Thus, it makes sense for the government to consider sale of the commercial enterprises (which are not part of strategic interests) and at the same time retaining a minority stakes in these ventures. Apart from helping the government to fulfill the fiscal target, it could also increase significantly the overall productivity in the country and also government's own equity wealth. Zeroing on such possible targets of divestment of CPSEs without losing valuation comfort can provide good wealth creation opportunity to the retail investors at this juncture.