Due to undervaluation of such stocks, govt could raise only . 1.4k cr of the planned . 40k-cr, thereby derailing divestment plan
As the financial year enters the last quarter, the Indian government is struggling with its fiscal deficit. By the end of November, this had reached 94% of the FY14 target with a third of the year left. One disappointment has been asset sales. The divestment of shares in state-owned companies, from which the government had budgeted to raise . 40,000 crore, has only yielded a paltry . 1,400 crore so far in the year.
That’s not surprising considering the significant and consistent erosion in the value of the Maharatnas, Navratnas and Mini-Ratnas, designated as such because they are supposed to be the best public sector undertakings (PSUs). The Navratna title was originally conferred on nine companies that were seen as capable of becoming global leaders and were given more financial freedom than their peers to achieve this stature. The other two titles were created as more companies were identified and slotted into the categories depending on their size.
An ET Intelligence Group analysis shows that the market capitalisation of the Maharatnas – a grouping of the seven biggest government companies, all of which are listed – dropped 17% in the last one year, when the BSE Sensex gained more than 4%. The listed Navratnas, 12 in number, lost 14.5% in value while the worth of 14 listed Mini-Ratna companies plunged 56%. Over a three-year period, the underperformance is even more stark. The Maharatnas dropped 25% in the three-year period, the Navratnas were 30% cheaper and the Mini-Ratnas lost 68%, while the BSE Sensex was up more than 13%.
All the seven Maharatnas — Bharat Heavy Electricals, Steel Authority of India, Oil and Natural Gas Corp, Indian Oil Corp, GAIL, NTPC and Coal India —have lost market capitalisation in the last 12 months. GAIL lost the least (6.4%) and IndianOil the most (33.2%), which is why the petroleum ministry recently opposed plans to sell shares in the company.
All the listed Navratnas lost value, with Power Grid Corp losing the least (less than 1%) and Mahanagar Telephone Nigam dropping the most (38.6%). Among the Mini-Ratnas, Dredging Corporation and Container Corporation of India were the only two generating positive returns for investors, each gaining more than 18% in the last one year, while ITDC and MMTC lost more than 90% of their value.
This degree of value erosion and the underperformance relative to the rest of the market are why the government has been hesitant about pursuing its divestment programme. Apart from the proposal to divest a 10% stake in IndianOil being deferred again last week, the listing of Navratna Rashtriya Ispat Nigam has been put off indefinitely.
Some of the reasons for the poor performance are business related.
“Most public sector companies operate in the domestic arena and are not export-oriented,” said Dipen Shah, head of research, private client group, Kotak Securities.
“With the domestic economy not doing well, the performance of these companies has suffered. There are various issues -- for example, oil companies are hit by subsidies, power companies by lack of fuel supply and engineering companies by projects getting delayed.”
The problem with the companies is also systemic in nature.
“The underperformance has always been a reflection that ownership and management need to be divergent,” said Gaurav Parikh, managing director of JSA Advisors, a Mumbai-based boutique investment advisory. “As long as it’s government-owned and managed, there will be corporate governance issues and government interference in the operations and toplevel appointments and paralysis in decision making,”
The government is now planning to set up an equity-traded fund (ETF) for state-owned companies to raise . 3,000 crore. This will hold shares of 11 PSUs with ONGC carrying the highest weightage. The acceptance of such a product and its success will depend on the performance outlook of each company, which doesn’t look too bright right now. “In my opinion, the underperformance will continue for the next year or two as India grapples with macroeconomic issues of high inflation, rupee depreciation and low GDP growth rate,” said JSA Advisor’s Parikh.
Shah of Kotak Securities sees most of these companies doing better once incremental reforms take place and procedural bottlenecks are removed. “PSUs definitely remain good longterm bets, but in the short-to-medium term, there is a lot of uncertainty over their performance,” he said. “Even within PSUs, those with a stronger balance sheet or high cash balance are more preferred over the rest.”
That’s not surprising considering the significant and consistent erosion in the value of the Maharatnas, Navratnas and Mini-Ratnas, designated as such because they are supposed to be the best public sector undertakings (PSUs). The Navratna title was originally conferred on nine companies that were seen as capable of becoming global leaders and were given more financial freedom than their peers to achieve this stature. The other two titles were created as more companies were identified and slotted into the categories depending on their size.
An ET Intelligence Group analysis shows that the market capitalisation of the Maharatnas – a grouping of the seven biggest government companies, all of which are listed – dropped 17% in the last one year, when the BSE Sensex gained more than 4%. The listed Navratnas, 12 in number, lost 14.5% in value while the worth of 14 listed Mini-Ratna companies plunged 56%. Over a three-year period, the underperformance is even more stark. The Maharatnas dropped 25% in the three-year period, the Navratnas were 30% cheaper and the Mini-Ratnas lost 68%, while the BSE Sensex was up more than 13%.
All the seven Maharatnas — Bharat Heavy Electricals, Steel Authority of India, Oil and Natural Gas Corp, Indian Oil Corp, GAIL, NTPC and Coal India —have lost market capitalisation in the last 12 months. GAIL lost the least (6.4%) and IndianOil the most (33.2%), which is why the petroleum ministry recently opposed plans to sell shares in the company.
All the listed Navratnas lost value, with Power Grid Corp losing the least (less than 1%) and Mahanagar Telephone Nigam dropping the most (38.6%). Among the Mini-Ratnas, Dredging Corporation and Container Corporation of India were the only two generating positive returns for investors, each gaining more than 18% in the last one year, while ITDC and MMTC lost more than 90% of their value.
This degree of value erosion and the underperformance relative to the rest of the market are why the government has been hesitant about pursuing its divestment programme. Apart from the proposal to divest a 10% stake in IndianOil being deferred again last week, the listing of Navratna Rashtriya Ispat Nigam has been put off indefinitely.
Some of the reasons for the poor performance are business related.
“Most public sector companies operate in the domestic arena and are not export-oriented,” said Dipen Shah, head of research, private client group, Kotak Securities.
“With the domestic economy not doing well, the performance of these companies has suffered. There are various issues -- for example, oil companies are hit by subsidies, power companies by lack of fuel supply and engineering companies by projects getting delayed.”
The problem with the companies is also systemic in nature.
“The underperformance has always been a reflection that ownership and management need to be divergent,” said Gaurav Parikh, managing director of JSA Advisors, a Mumbai-based boutique investment advisory. “As long as it’s government-owned and managed, there will be corporate governance issues and government interference in the operations and toplevel appointments and paralysis in decision making,”
The government is now planning to set up an equity-traded fund (ETF) for state-owned companies to raise . 3,000 crore. This will hold shares of 11 PSUs with ONGC carrying the highest weightage. The acceptance of such a product and its success will depend on the performance outlook of each company, which doesn’t look too bright right now. “In my opinion, the underperformance will continue for the next year or two as India grapples with macroeconomic issues of high inflation, rupee depreciation and low GDP growth rate,” said JSA Advisor’s Parikh.
Shah of Kotak Securities sees most of these companies doing better once incremental reforms take place and procedural bottlenecks are removed. “PSUs definitely remain good longterm bets, but in the short-to-medium term, there is a lot of uncertainty over their performance,” he said. “Even within PSUs, those with a stronger balance sheet or high cash balance are more preferred over the rest.”
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