Needed: A pipeline of PSU offers to cool abnormal market rally

The government will have to be unusually quick to exploit the current window of opportunity by divesting stakes in fundamentally strong public sector firms and channel money into large infrastructure and development projects

With the markets on fire, many investors seem to think that the government must grab this opportunity to absorb the gush of foreign investment coming into India and overheating the secondary markets. There is too much money chasing too few stocks and the market desperately needs a slew of solid companies to use this opportunity to raise finance.

Otherwise, we are bound to see a rush of opportunistic promoters with dodgy governance, mopping up the money through pumped-up valuations for companies with uncertain long prospects. More importantly, the money raised through disinvestment can be used to bridge the fiscal deficit, instead of the finance ministry's current strategy of getting its revenue agencies to harass genuine business to pay more.

On the other hand, with all the negatives of being dependent on the whims of politicians, public sector undertakings (PSUs), especially the ones that have been lined up for disinvestment, have rock solid businesses. We spoke to Disinvestment Secretary Sumit Bose on whether there was any possibility of increasing the pace of disinvestment. He said, "We are doing much faster this time. Until now we never had a pipeline. Earlier when we divested NMDC (National Minerals Development Corporation), NTPC (National Thermal Power Corporation) and REC (Rural Electrification Corporation), we had to get cabinet approval first, after which we started the process of appointing investment bankers, other intermediaries, starting the due diligence process and then filing with SEBI (Securities & Exchange Board of India). A few months ago, we have got fast-track approval from the cabinet".

This means that as soon as the appropriate administrative ministry and the finance ministry agree that a particular company should come up for disinvestment, the IPO processes such as appointment of intermediaries is started without waiting for the formal approval from the Cabinet Committee. He also says, the experience of handling past issues has helped create a pipeline since the ministry is "not reinventing the wheel each time".

According to Mr Bose, the pipeline is as follows: Once the Coal India offering is complete, Power Gird Corporation is scheduled to hit the market on the Monday just after Diwali; next in line is Manganese Ore India Limited (MOIL) which will be followed by Shipping Corporation of India (SCI) towards the end of November. In early December we are looking at Hindustan Copper Limited (HCL) and then in January, at SAIL (Steel Authority of India Limited), Indian Oil Corporation and Oil and Natural Gas Corporation.

On whether the government is planning to revise the target of Rs40,000 crore that it hopes to raise before 31st March, Mr Bose says no, even though the secondary market outlook as well as the extent of foreign funds coming into India have accelerated dramatically since the target was set many months ago.

In fact, most market intermediaries as well as big investors admit to being seriously worried about the rising indices and ridiculously high valuations. The only way to cool excessively high prices in the secondary market is to infuse good quality stock into the primary market. For that to happen, policymakers in the government will have to be unusually quick to exploit the current window of opportunity and channel money into large infrastructure and development projects.
But even the current focus and speed is fairly unusual for the government of India and the Disinvestment Minister is able to work with PSUs to complete the filing processes within a month after all approvals are in. So far, the draft prospectuses of Power Grid, HCL and MOIL are already filed with SEBI for approval, the due diligence for SAIL has begun and while the rest are in the pipeline.

With regard to market outlook, Mr Bose told Moneylife that US investors are not too worried about Indian markets being overvalued or overheated right now. This is what he has gathered from his interactions with top institutional investors in the US, whom he had met individually. However, given the current disclosure norms, there is not much clarity as to whether the sudden inflow is short-term in nature. Money has been gushing into India Exchange Traded Funds that in turn invest in India index stocks. ETFs are heavily traded products and are essentially short term in nature.




7 years ago

It will cool the present and kill the future.Why our govt is so bankrupt that it is selling shares of Public enterprises only to reduce fiscal deficit without aiding to enterprise concerned though the money mopped up is due to brand name of that enterprise. For example Rs 15000 crore fetched by GOI will not help CIL though these are being mopped up taking help of brand name of our King Coal. It will even harm enterprise concerned as future revenue generation potential of the same will even reduce. So instead of these mindless disinvestment procedures GOI should adopt some other means for revenue generation to finance its fiscal deficits arising due to wrong subsidies in many cases. For example LPG is subsidized by Rs 20000 crore per year subsidy to rich lpg users though free solar thermal and cheaper induction energy are available as substitute of LPG.

Shadi Katyal

7 years ago

Who would like to invest in such sinkholes of investments.PSU like STC,SAIL,MMTC have left a very black mark in the world markets as they always want their share and thus are not
True it is beneficial for the employees due to permanent tenure but as an investor why one would bother to get involved with unions,unproductive and indiscipline bureaucrats?
Can anyone solve the mystery of Ashoka Hotel of Delhi, where the ministers have parties without payiong bills and employees have their own way to manage their own loot.
Compared to any private enterprise these are all failures as have no competition.
Air India vs Jet Airways is a good
example beside many others.
I recall some PSU hotel in Orissa could not get a client when was owned by PSU but now making profit and ther are many examples.
STC sales and purchases are not accountable and thus we read horror stories of buying 3rd quality goods at above market prices.
It is gift by Nehru and that might be the reason GOI unwilling to shut them for good.



In Reply to Shadi Katyal 7 years ago

Its wrong to say that PSUs are gift by Nehru. Decisions taken in the 1950s cannot be judged by today's yardsticks. Nehru was a visionary who also thought about BARC, IITs, ISRO, Institute of Science, etc. in a different era. The nation is grateful to this statesman.


7 years ago

PSUs are sheer example of monopoly of state and lack of competetiveness -They are making profits just because their monopoly is guaranted by GOI-whenver competetion comes-they are unable to meet even their own expanses-and in most of service related sectors like BSNL mobile-no one is to listen to customers-becasue their salaries and job is guaranteed-i think they have been given undue importance in our socialistic culture and they should be put in competetion with private sector without any subsidies or favour from govt-then only their equity should be offered to public-


7 years ago



Utsal Karani

7 years ago

Excellent article. I completely agree with the logic.


7 years ago

Lot of money is coming to indian markets and valuations going high-that may be right but it does not prove the point that people should invest in all these WHITE ELEPHANTS which are symbols of corruption and RED TAPISM with only intention of GHAR BHARO by most of beurocrats-there are still many small and mid caps stocks which are at low valuations and giving best returns in terms of profit-so investment should be done in such stocks rather then these corrupt PSUs where coal mafia and ore mafia are real owners-

Shadi Katyal

7 years ago

One should ask oneself simple question that who will like to pour their investment in such PSU which are nothing but den of corruption,lack of any productivity and union workers who will strike on drop of pin.
There is lot which doesnot meet the investment criteria and that is why even the smaller nations like Thailand, Malaysia and Singapore are able to attar cat investments.
Has anyone in GOI ever looked the major shocking drawbacks due to RED TAPE and Bureaucracy.
World papers might give boost to India for becoming an industrial power but where is the trained and disciplined labour ? Where are the ethics of working?Why would anyone invest in such loosing pits?


7 years ago

baapre what logic !!!

Great expectations from Infosys this quarter

After a poor showing against TCS in Q1, most analysts on the Street expect Infosys (results on 15th October) to be a top performer among Tier-1 IT stocks this quarter


Net sales (INR): Rs66.1 billion-Rs68.4 billion
Net sales ($): $1.44 billion-$1.48 billion
Net profit: Rs16.8 billion-Rs17.6 billion

Rs bn                Jun-10  Sep-09
Net sales           61.98    55.85
Net sales ($bn)  1.36     1.15
Net profit          14.88    15.40

Ready Reckoner for guidance:

Q2 sales: Rs65.63 billion-Rs66.26 billion or $1.41 billion-$1.43 billion
FY11 sales: Rs264.4 billion-Rs268.8 billion or $5.72 billion-$5.81 billion
FY11 EPS: Rs112.2-Rs116.7 or $2.42-$2.52

  • Sequential growth expectations are almost all upwards of 6% up to 10% against the guided growth of 4%-5%
  •  Most expect Infosys to outperform peers this time since promotions at TCS and Wipro and wage hikes at HCL Tech are expected to hit those companies. Also, its Q1 growth was lower than expected so there is some amount of low base effect
  • Margins are expected to bounce back (after declining in Q1) on revenue growth and favourable currency (euro and pound up against the dollar and the rupee has depreciated against the dollar) and better utilisations
  • Most expect at least a marginal hike in the dollar guidance for the year. However, some believe that strong appreciation towards the end of the quarter may prevent this from happening. Also, because of this, comments about the rising rupee and its effect on profits in the second half will be keenly watched
  •  Expected to leverage the most on a pick-up in discretionary spend.

Infosys has not yet disclosed its September shareholding pattern - surprisingly tardy for the high corporate governance oriented company.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


Earnings analysis: Sintex, Castrol, Exide...

Though net profits have jumped, operating profit growth for the first few companies that have declared results has been a mixed bag

Net sales: Rs 9.2bn (estimated range was Rs 8.2bn - Rs 10.23bn)
Net profit: Rs 1bn (estimated range was Rs 686mn - Rs 1.12bn)

Results were in the middle of the estimated range for sales and on the higher side for profits. Some of the highlights of the results were

  • Better than expected margins (monolithic - 23%, custom moldings - 27% and prefabs - 25%)
  •  An increase in working capital
  •  Good growth in the monolithic business, as expected
  • Earnings upgrades by some brokers (who were on the lower end of the estimate scale)
  •  Cash flows likely to be under pressure. Historically too, Sintex has not generated positive cash flows. However, going by the promoter's plans to take a stake in a 1000MW power plant which they are putitng up, invest in oil and gas exploration, get into construction business, and buy a custom-molding company overseas, cash flows are likely to be tighter than before.
  • Among subsidiaries, Bright Brothers' revenue rose 50% yoy to Rs 660mn and Neif rose 25% to Rs 2.2bn
  • Revenue from water tanks remained stagnant at Rs 440mn
    In the September quarter, Sintex's promoter shareholding went up to 34% from 30% in June-10 and 30% in Sept-09; FII shareholding increased significantly to 33% (29%, 28%); and DII share came down by quite a lot to 14% (18%, 22%).

Net sales: Rs 6.4bn (estimated range Rs 6.4bn - Rs 7.2bn)
Net profit: Rs 1.2bn (estimated range Rs 1.1bn - Rs 1.5bn)

Results were at the lower end of the range for both sales and profits. Here are a few highlights:

  • Volumes fell a little more than expected but net realisations made up for the loss because of the 4% price hike the company took in July.
  • Operating margin dip was a little lower than the expected 500bps due to lower advertisement costs and the higher realisations. Operating margins were at 26%. The automotive segment reported a growth in margins while the industrial segment showed a dip
  • Raw material costs increased 11% qoq

In the September quarter, Castrol's FII shareholding went up to 6.3% from 5.8% in June and 5.2% yoy. However, the DII share came down to 7.3% from 7.8% in June and 8% yoy. Promoter share was steady at 71%.


Net sales: Rs 11.2bn (estimated range Rs 11.4bn - Rs 12.3bn)
Net profit: Rs 1.6 (estimate Rs 1.8bn)

Both net sales and net profit came in at the lower end of the range.

  •  A fall in margins (qoq) was perhaps the most disappointing aspect of the results due to an increase in operating costs; but the management has given a postive guidance and said that margins will improve sequentially from here as capacity constraints ease (new two-wheeler battery facility at Ahmednagar, additional lines at two of its four-wheeler battery facilities commissioned in September). Ebitda margins declined 422bps yoy and 110bps qoq to 22%
  • The lead recycling advantage is not coming through as expected
  •  Qoq decline in revenues was also disappointing
  • As expected, consumer UPS batteries did well, but telecom and OE industrial segments declined
  •  Net cash levels at Rs 7bn
  • Results include high other income at Rs 196m and and exceptional income of Rs 469mn from transfer of leasehold land
  •  Capex spend maintained at Rs 4bn for FY11 -- much higher than the ~Rs 1bn in FY10 -- free cash is expected to dip substantially this year
  • High levels of cash and investment on the balance sheet indicate that QIP money is still largely unused

In the September quarter, Exide's promoter shareholding remained constant at 46%; FII shareholding increased to 15.4% (14% in June-10, 9% Sept-09) and DII share dipped to 16.6% (18%, 20%).


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