Like most other policy actions of the government the entire process of
disinvestment has now become one of destructive disinvestment. Initially
when the entire disinvestment programme was launched in a bigger manner
under the NDA government the idea was to use potentially positive
policy moves to disinvest or sell out companies in a strategic sale
manner where the ownership changes to the private sector and as such the
government tag is removed from the companies, greater professionalism
comes in and the process creates value for the investors. However the
entire disinvestment programme subsequent to the Coal India sale has
become one which is destroying the wealth that is imbedded in PSU’s as
the sales are happening at lower and lower valuations and at a time when
the market is not in a position to absorb so much supply. Just to meet
disinvestment targets PSU’s that are owned by the President of India and
are funded by tax payer money are being dumped at absurd valuations.
On the other hand white elephants like Air India, BSNL etc are getting
dole outs from the government again out of shareholder money. There was
an opportunity to disinvest out of companies like MTNL in a strategic
manner at some stage which would have helped the company not only
survive but also thrive due to its predominant presence in Delhi and
Mumbai. It is absurd that the government wants to continue to run an
airline, a telecom company etc at a time when these companies are
clearly not equipped to compete with the private sector in a competitive
environment.
Strategic sales like Maruti, Hindustan Zinc etc
have helped these companies adapt and thrive by improving productivity.
However the way disinvestment is being carried out today, at the worst
of times makes me wonder what the thought process of the government is.
When the disinvestment of BHEL and SAIL were envisaged we had a
scenario where BHEL was doing extremely well due to the boom in the
power sector and because the economy was doing well. This was the time
when global steel prices were trading at high levels and the stock
prices were at around Rs 200 levels. This was the time when the
government started talking about the SAIL disinvestment. However by the
time all the ministries agreed to the disinvestment the stock price had
halved. Subsequently the disinvestment was postponed and the stock now
trades at Rs 40. BHEL of course is a case of destruction of the business
by the government. They allowed zero duty import of power equipment
ostensibly to benefit the power generators who were going to set up huge
capacities. A large number of companies like Larsen and Toubro,
Thermax, Bharat Forge who set up domestic capacities were thus made
uncompetitive. This bought about a number of non serious players who
tied up with Chinese power equipment companies or thought that they
would bid at any level and also bet on an appreciating INR while bidding
aggressively for NTPC and other SEB orders. The absurd policy of lowest
bidder wins that PSU;s follow lead to companies like BGR Energy bid
very aggressively and get orders. They had plans of importing the first
few equipment packs, however at that time the INR was at Rs 45 levels.
Now the same INR is at Rs 60 levels and as such the imports have become
clearly uncompetitive. Now NTPC will need to go for a rebid and the
capacity addition will be hugely delayed.
On the other hand
serious players who had set up domestic capacities do not have much
orders. Also by giving Ultra Mega Power Project orders to players who
bid very aggressively the entire power capacity addition targets have
gone for a toss. However this is not the point of the article. The main
point is that irrational competition, bureaucratic & environmental
delays etc have made the entire power sector sick. As a result today
BHEL is in a bad shape and the stock price now trades at just 20% of its
peak value.
The initial disinvestment of Coal India was done
appropriately. However later the government decided to sell more of the
company when the price was Rs 400. However at this time the Coal scandal
was on, global coal prices were falling and Coal India has been unable
to increase production courtesy Mr Ramesh/Ms
Natrajan. The market
sentiments also were bad. As a result the stock price has crashed to Rs
260 levels. Coal India has Rs 50,000 Cr plus of cash, the government
should have just taken an Rs 10,000 Cr dividend.Similarly NTPC Follow on
Offer disinvestment was planned when the entire power sector was in
doldrums, NTPC capacity addition was lagging and there were fuel price
issues. The issue was planned when the stock price was Rs 200 plus and
fell to Rs 140 at the time of disinvestment. Similarly NMDC was dumped
into the markets at a time when the iron ore mining ban issue is
prevalent all over the country and iron ore prices globally have
crashed. The better time obviously was when the iron prices were better
and the mining issues were resolved.
Similarly some other
stocks like MMTC etc were dumped at extremely stressed valuations. At Rs
400 the government found the price of IOC to be very low when
disinvestment was planned more than a year back. Now when the stock
prices is below Rs 200, fuel losses have gone up due to the fall in the
value of the INR and there is a general negative sentiment about PSU oil
companies. Disinvesting at this stage is the worst thing to do.
Similarly Hindustan Copper and Nalco have been sold at absurd valuations
when the commodity stocks in general are in doldrums.
I have
mentioned this earlier also the better opportunity obviously is to sell
high. Strategic sale of ITC will yield the government Rs 50,000 Cr, get
in over $ 8 billion of FDI and also reduce the pressure on the INR. The
remaining holding of Hindustan Zinc could also have been disinvested at
extremely good valuations till last year. Today it might be difficult
due to the pressures being faced by the Vedanta group.
MARKETS
Global Markets have panned out as I expected with the rally continuing
in most developed markets. Most developing markets have also stabilized
and bounced well from their bottoms. However as expected India has been
the underperformer. The big blame obviously lays with the policy mis
steps of Subbarao. I am actually amazed that his replacement has not
been named even as he has less than a month to retire. The INR has
continued to fall even as other correlated currencies of countries like
Brazil, South Africa, and Turkey etc have stabilized. Further tightening
of liquidity has created more downside risk to economic growth. While
the global equity outlook still looks quite encouraging, India has
clearly become one of the least preferred markets.
Valuations
ex of FMCG, IT and Pharmaceuticals are extremely cheap, approaching or
approached 2001-02 levels. There is money to be made but with a long
enough time frames as it is difficult to expect much from the current
government which is now just focussed on the next elections.
