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.