PSU stock rally: Don’t bank on privatisation, Kotak warns

Kotak Institutional Equities in its latest note said it is ruling out privatisation of most of the larger PSUs given the stated policy of the government to retain control over one or more PSUs in a strategic sector.

Under its New Public Sector Enterprise Policy of February 2021, the government classified certain sectors as strategic for national security, energy security, critical infrastructure, etc. reasons. These four broad sectors were atomic energy, space and defence; banking, insurance and financial services; power, petroleum, coal and other minerals; and transport and communication.

It finds the Dalal Street’s hopes about privatisation of PSUs quite misplaced given the issues of policy, practice and price. It said the government’s stated policy on PSU privatisation, practical issues seen in previous attempts to privatise PSUs and high prices of PSUs should provide plentiful caution against making privatization as an investment thesis for PSUs.

"We note severe practical challenges that have stymied and may stymie the government’s privatization efforts. The case of CCRI is noteworthy, as the government had to rework several agreements between CCRI and Indian

Railways to enable the privatisation of CCRI, which is yet to take place despite being cleared for privatization in November 2019," it said.

It gave an example of BPCL that did not see much interest among potential bidders, given the sunset nature of the oil refining and marketing sector. "BPCL is a good example of the difference in approach to investment and ownership between strategic (long-term view of sector) and financial (relatively short-term view) investors," it said.

Kotak said it is not sure if the privatisation thesis for PSUs is an ex-ante reason for or a post facto justification for the sharp run-up in stock prices of PSUs in the past few months. It said it was surprised by the privatisation argument for PSUs in light of stated policy of the government for PSUs, practical challenges seen in the attempts to privatize BPCL, CCRI and high prices (inflated valuations) of the PSUs with many PSUs trading at a large premium to their private sector counterparts, presumably the bidders for the PSUs.

"We note that valuations of most PSUs have expanded sharply over the past few months. The high valuations of the PSUs may reduce the interest of potential bidders even assuming that the government was keen to privatise some of the PSUs. In fact, some of the possible candidates for privatization in the non-strategic sectors (metals, transportation) now trade at a large premium to their private sector peers," it said.

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