After firing off policy changes at frenetic speed, the Government has now trained its sights on the public sector divestment programme. Offer documents are reportedly being dusted off for stake sales in five public sector units (PSUs).
But the Government in its new go-getting mood, should not rush pell-mell into divestments just because it has a target to meet by March. Instead, some smart choices on the timing and candidates for stake sales can maximise value for the exchequer. Here are a few divestment tips, mustered from private sector promoters who have mastered the art of making hay while the sun shines.
Timing is everything
Investment bankers will have you believe that there is something very rational and scientific about stock market valuations for a business. Steel companies cannot trade above replacement cost; a bank must be priced at book value and an airline company must trade at so many times operating profit, and so on and so forth.
But the truth is that there is nothing sacrosanct about stock valuations. The very same investors who baulk at buying a bank share at even its book value today, may happily shell out three times this sum in more conducive market conditions.
Whether institutional investors choose to haggle over every rupee or write out generous cheques just on the strength of ephemeral “growth potential” depends on two things — the market mood and whether the sector from which the company hails is the flavour of the moment.
Going by this yardstick, this is a good time to push through public offers in PSUs. With the market rally taking the indices up by over 20 per cent and foreign investors re-discovering the India story, there is enough optimism in the air to fuel investor appetite for new offers.
But this optimism may not extend to stocks from every sector. Those with commodity or global linkages, for instance, are still a no-no. With dark mutterings about China’s shrinking demand for commodities and the coming ‘bear market’ in steel, this may not be the best of times to sell stakes in SAIL or RINL. FMCG or pharma companies — the current darlings of the market — would be ideal. But as the State doesn’t seem to own them, it may have to make do with NTPC, given that recent reform moves have powered up interest in the sector. Oil India too may fetch a reasonable price with oil prices on a firm wicket.
Play on scarcity
If the Government can’t find companies which are fortuitously placed in their business cycle, the next best thing is to find those which are in unique businesses.
In the dodgy markets of the past three years, the only primary market offers which have managed to garner good response at a fair price are those with scarcity value.
Be it MCX-SX, Lovable Lingerie or MT Educare, these offers sailed through mainly because stock exchanges, inner-wear makers and tutorial companies aren’t exactly commonplace on the bourses. A unique business makes investors not only willing to stand in queues to bag allotments, but to shell out a hefty ‘scarcity premium’ too.
This suggests that the Government may stand a better chance of taking Hindustan Aeronautics public today, than steelmaker RINL. The already listed Bharat Electronics, Engineers India and Container Corporation also make the cut on the scarcity factor.
Selling any new share to prospective investors in a skittish market requires skilled marketing. In the previous tranche of divestments, the Government made the mistake of choosing investment bankers like it does road contractors. It hired the ones who bid the lowest or even zero, fees. Well, a zero fee begets zero service. If the merchant banker has no pecuniary interest in maximising the offer proceeds, why would he do his best to market it? Now that the Government has a second chance, it is necessary to change this approach.
Divestment mandates should be granted to the merchant banker who undertakes to fetch the best price for all the shares on offer. His fee must be pegged to the offer proceeds. In the opportunity-starved markets of today, it shouldn’t be too difficult to sell shares in established companies with quality assets, low debt and good governance practices. Quite a few PSUs fit this description.
But to draw in investors, they also need to offer growth prospects. Piles of cash are passe. With the market assigning almost no value to idle cash, what investors would look for, is how that cash is going to be used to improve shareholder returns.
PSUs can draw up, and share with investors, concrete plans on expansion, new launches and business strategy for the next five years.
Forget deadlines, targets
Finally, the divestment programme involves one-off stake sales in prized assets. Whether the offers can go through depends on ever-changing market conditions. Then, why set deadlines and targets on it each year and then be criticised for missing them?
After all, private sector promoters looking to raise money routinely put off their offers if market conditions aren’t conducive. Not many of them would sell their holdings at rock-bottom prices just to show a windfall ‘profit’ for a particular financial year. This should apply to the Government too.
The divestment programme should have only one objective — fetching maximum value for the exchequer.
As for the fiscal deficit, it can be bridged this year by selling the blue-chip shares held by the SUUTI (Special Undertaking of the Unit Trust of India). Or PSUs with surplus cash can also be asked to step up their dividend payout ratios.
In 2011-12, 50 listed PSUs paid back 30 per cent of their profits, nearly Rs 30,000 crore, as dividends to the Government. Raising this payout ratio to 40 per cent can net a neat annual income of Rs 9,000 crore.
Higher dividends can have spin-off benefits too. It can actually perk up stock valuations for these firms, ensuring better prices when the Government chooses to divest its stake.