Right recipe for PSU IPOs

Public Sector Undertakings (PSUs) have almost always been excellent investment opportunities. The Initial Public Offerings (IPOs) of NTPC, Power Finance Corp and Rural Electrification Corp have created immense wealth for investors in the past four years. NTPC has been an outperformer with nearly 250% returns, while the others have also generated over 100% returns. This is proof of the quality of PSUs on offer. Also, during the bear phase, PSU scrips did not fall as hard.

There is some discomfort among investors due to the post-listing performance of NHPC. However, only speculators who were looking at gains on listing day have lost money (that too marginally). Given the longterm prospects of this company, there should be little cause for concern.

It would be worthwhile recounting the case of REC. The company that made an offer at Rs 105 was listed on 12 March 2008 at a small premium and continued to quote marginally above the offer price for the next three months. During the bear phase, it fell to a low of Rs 55 and quoted below the offer price for almost 10 months (2 June 2008 to 17 April 2009). However, since then, the stock has done very well and was quoting at Rs 235 on 18 November 2009, a return of over 120% on the offer price in less than two years.

When the Oil India IPO hit the market, several so-called experts said it was overpriced. This scared retail investors, and though the IPO was oversubscribed by over 30 times, the response came mainly from the institutional investors. Retail investors are now regretting their decision because the Oil India stock listed at a premium and is presently trading at 14% above the issue price.

As the past has shown, PSUs perform better after the listing and, hence, investors stand to gain. Listing helps a PSU to subsequently raise capital from the market with ease. It also raises the PSU’s profile with customers, suppliers, investors, financial institutions and the media. Importantly, listing also increases transparency, accountability and ensures better corporate governance. It changes the attitude of the government towards such companies. The government wants them to perform better.

Often, PSUs are considered inefficient, loss-making companies. There are several such examples, but the ones coming to the capital market are among the best and most profitable PSUs. In almost all the cases, these are decades-old companies with a dominant market share and a pan-India reach. The 46 listed PSUs, along with 26 PSU banks and 6 other PSUs, constitute over 32% of the total market cap of 4,868 companies. The PSUs also offer diversification as they span a wide range of industries from coal to shipyards, from paper to steel and power to telecom.

It is heartening that the government has reaffirmed its intention to make public offers of PSUs. It has proposed to raise public holding in listed PSUs to 10% through Followon Public Offers (FPOs) and divest 10% government holding in unlisted, profitable PSUs.

This presents an ideal opportunity for retail investors. Based on the Cabinet decision, 17 of the 46 listed PSUs would be required to make an FPO with a collective offer size of nearly Rs 30,000 crore (see table). Of course, over 85% of this would come from MMTC and NMDC. In addition to this, there could be FPOs from Sail and NTPC. There are about 102 unlisted, profitable PSUs, and at least 35 of these are imminent IPO candidates (see table).

A good beginning has already been made with the NHPC and Oil India IPOs. However, these were in the pipeline for nearly two years. Regrettably, the next one is nowhere in sight. Though several announcements have been made over the past few months, not even one PSU has filed its offer document with Sebi.

One hopes the recent announcement will not turn out to be just that. The government should not wait for an ‘opportune time’. It waited for months for market conditions to improve in the hope of getting better valuations for NHPC and Oil India. Private promoters can be greedy, the government should not be. Even if it is looking for gains, it should realise that real and substantive gains will accrue later.

For retail investors, PSU shares offer the ‘safety of capital’ that they want. This should be combined with attractive pricing. It is hoped that as in the past the government will be considerate in pricing its IPOs. It should, in fact, offer a discount (of at least 10%) to retail investors. This will also reduce the post-listing pressure and PSUs will always be on the investors’ thank-you list. One would also expect that the new auction option announced recently by Sebi shall be adopted by the PSUs for their FPOs. This would mean good news for retail investors because they would be allotted shares at the floor price, while institutional investors would pay a higher price in the auction. Ideally, the fixed price route should be used for retail investors because they are ill-equipped for book-building. Investors should use the new application supported by blocked amount (ASBA) system, which would release monies quickly for them to apply in successive issues.

It would be commendable if the government lives up to its promise of enabling every Indian to own PSU shares. For this, it should reserve all PSU issues for retail investors. Even if this does not happen, the PSU offerings mean the shape and size of the retail investor’s portfolio can change forever—and for good.

Prithvi Haldea, Chairman and Managing Director, Prime Database