As the Government of India's divestment programme for the current fiscal was kicked off today with the divestment of 9.33 per cent stake in MMTC at a steep discount to the market price, six public sector enterprises (PSEs) shares forming the CNX PSE index hit a fresh yearly low on the NSE today.

Three other shares missed slipping into a fresh 52-week low by a whisker and Coal India Ltd, one of the prime candidates for divestment, is hovering close to its earlier yearly low.

It was due to the very low floating stock of less than 1 per cent of its equity that the MMTC share had commanded a high valuation. Even at the OFS price of Rs 60, the valuation was very high as the company’s EPS was in the negative (it had posted a loss of Rs 70 crore last year).

Six PSE stocks crash

The CNX PSE index crashed by 35 points with a host of shares hitting fresh 52- week lows. Engineers India Ltd fell to a new low of Rs 148.25 and SAIL slipped to Rs 53.90. NMDC, which had come with an OFS at a price of Rs 147 in December 2012, was down to a new low of Rs 107.40 and in the past one year, it has lost nearly 50 per cent from its peak of Rs 202.80.

The other PSE stocks to fall to new yearly lows were GMDC (Rs 122.05), NHPC (Rs 17.15) and SCI (Rs 34.35).

There were others that came very close to breaching their previous lows. GAIL dipped to Rs 301.20 which is close to its earlier 52-week low of Rs 300.25, BHEL was down to Rs 174.70 (earlier low Rs 174.25) and HPCL fell to a low of Rs 257 (Rs 255.55).

Another stock to come in the vicinity of its previous low was Coal India Ltd which touched a low of Rs 295.60 as against the earlier low of Rs 289.40. All these stocks made mild recovery but that some of these stocks might figure in the disinvestment list, particularly those stocks in which the Government holding is 90 per cent or higher makes tracking of their share price vital. Of particular concern is Coal India because of expectations that nearly half of the Rs 40,000 crore of divestment money would come from the dilution of 10 per cent stake in the coal behemoth this year.

MMTC shares sink

But outside the PSE index, MMTC shares sank to a 52 week low of Rs 189.05, down by Rs 21 and it hit the lower circuit as the stock had shed 10 per cent. In fact, it had only sellers for 35.44 lakh shares and no buy quotes on the NSE. Another PSE stock to fall to a new 52-week low was another disinvestment candidate Neyveli Lignite Corporation (NLC) that fell to a 52-week low of Rs 57.

It raises a nagging question as to whether those who are already invested in companies slated for disinvestment should hold on to them or exit to re-enter later. The experience of investors of even some of the PSUs with a substantial asset base like NMDC has not been positive. In fact, NMDC has lost nearly 40 per cent in value since the OFS in December, making investors wonder whether it would make sense to pick up the stock post divestment than picking up shares during the OFS.

Speaking to Business Line, D. Balasundaram, Founder of Coimbatore Capital Ltd and former President of the Coimbatore Stock Exchange, said the problem with MMTC was that it was mainly a trading company without any large physical asset. The fact that the floating stock was less than 1 per cent of its equity had contributed to the very high valuation of the stock, which had hit a 52-week high of Rs 860 (Aug 16, 2012). That was huge price to pay for a Re 1 stock.

He said even at Rs 60, MMTC stock was not cheap and was "not worth" at Rs 60. He expected that the existing investors to sell the stock and buy it at the OFS and the stock might stabilise at the OFS price.

On whether the Government should look at options like buyback of the entire floating stock before going for a public issue of low-float companies to avoid huge losses for existing investors, he said this was not a workable solution. Buyback would have to be done at (inflated) market price before government offers the shares again through an IPO. Instead, the Government might think of some safety mechanism as in the case of SMEs to protect investors.

Balasundaram felt that it would be prudent for retail investors not to buy shares through the IPO/OFS in illiquid stocks but wait for the share price to stabilise post issue before they pick them up. This was because low floating stock might give a stretched valuation.

(This article was published on June 13, 2013)
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