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S. Vaidya Nathan

STOCKS of public sector undertakings (PSUs) appear set for another good year, following a star turn in 2003. Disinvestment and enhancement of floating stock are likely to be the key drivers.

This may lead to enhanced trading interest and higher volumes with positive implications for the stock price.

The ongoing bullish phase has still some steam left before a corrective phase sets in. Even in a downside, the risks in PSU stocks may be lower though they will, inevitably, be part of any correction. The magnitude of price erosion may be lower and this can be recouped in a disinvestment, even if the process will get a boost only post-elections.

Before that, the Government's plan to offload a 10 per cent stake in ONGC and GAIL is likely to be completed. The resultant improvement in the floating stock, and liquidity, driven by market fancy, will be value-accretive.

This is despite a sharp uptrend over the past year, when ONGC's stock price almost trebled, and its market capitalisation crossed Rs 1,00,000 crore.

The disinvestment process is set to gather momentum as the present dispensation at the Centre appears likely to return to power. With Parliamentary elections likely to be advanced to April-May, the Government may have a free hand for much of fiscal 2005 to actively pursue strategic disinvestment.

There is, no doubt, considerable resistance at the level of the trade unions. Quite a few disinvestment exercises such as Hindustan Petroleum (HPCL), Madras Fertilisers and National Aluminium also await court rulings. But it increasingly appears that the Government will be in a position to get Parliamentary approval to go ahead in cases such as HPCL and BPCL, which were nationalised by Parliament Acts.

This requirement was the thrust of the Supreme Court ruling a few months ago. The apex court is now taking a fresh look at the issue. Even if it stays with its earlier stance, the Government may be well-placed in both Houses of Parliament by early 2005 to push through the requisite changes.

An aggressive push to disinvestment through the strategic partner route appears on the cards over the next couple of years. Fiscal requirements, too, would drive the process. This is likely to ensure a firm undertone in the prices of PSU stocks. Considerable upside potential may also be in store in stocks such as HPCL, BPCL, Nalco, Dredging Corporation (where an offer for sale is also likely soon), Neyveli Lignite and Engineers India, which are prime disinvestment candidates.

The likely uptrend will take PSU stocks out of line with fundamentals till the open offer is completed by the entity that picks up the strategic stake of 26 per cent in the first stage.

This was been the case earlier, too, with companies such as Hindustan Zinc, IBP, IPCL and VSNL. If one holds PSU stocks now, there may be an inclination to cash in on the gains over the past year. But it may be better to hold such stocks.

The caveat is: PSU stocks tend to shed such disinvestment-driven gains rapidly once the open offer is completed; in cases where the open offer is imminent, investors can consider selling a large proportion of their holdings through secondary market route, unless the open offer price is substantially higher.

If one waits to participate in the open offer, holdings that are not accepted may have to be sold at considerably lower prices compared to the offer price or the market price that prevailed in the homestretch to the open offer.

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