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PSU buybacks: Let the government alone buy back the shares

Most of these PSUs are engaged in minerals and resources. Over the last two years, the global prices of these outputs have fallen along with crude oil prices. Hence, the core operating profits for some of these PSUs have come down substantially

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Cash-rich and also profit-making public sector undertakings (PSUs) have come out with offers to buy back their respective shares. Post these announcements, the stock prices of these PSUs have moved up quite significantly and now trading above the offer prices. Many investors of these PSU stocks are now in the state of uncertainty as to whether they should surrender their shares in these buyback offers or not.

For some of these PSUs, the interest income is significantly more than the operating profits at present. Hence, the shareholders are worried whether the current market prices would fall post completion of these buybacks as they would burn a lot of cash for buying back their shares and therefore, the "other income" (basically earned out of interest income from the free cash) contribution to overall profits would come down consequently.

Most of these PSUs are engaged in minerals and resources. Over the last two years, the global prices of these outputs have fallen along with crude oil prices. Hence, the core operating profits for some of these PSUs have come down substantially. Consequently, the contribution of operating profits to the net profits has become much lesser as compared to those of interest incomes from the free cash. Therefore, the overall ROCE (i.e. return on capital employed by the PSUs, in the form of both interest income and operating profits) has come down significantly in the last 4 to 6 quarters.

However, already the prices of these resources (like coal, manganese ore prices, etc) have gone up significantly this year. Hence, the possibility of operating profits improving significantly is rising for these PSUs. If any of these PSUs were making significant double-digit ROCE (above 16%) before the major fall of resource prices, then the long-term investors should hold on to the shares and skip the buyback offers, which are mostly lower than the current market prices. In such a scenario, the government alone would tender the shares in the buybacks.

The anticipated improvements in the prices of minerals and resources along with significantly reduced equity capital of these PSUs (which are expected to return to ROCE of over 16%) would eventually lead to earning per share from core operations rising more than the proportionate fall in the interest income, which is only around 8% on free cash for these PSUs. This would also reduce the possibility of government divesting larger quantity of its shares in the future and thereby avoiding possible supply-side pressures on these stock prices. Thus, it could be a win-win situation for the public shareholders, if they retain the stocks of these PSU which promise the ROCE of more than 16% in the near future.

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