How to play the great Indian PSU stake sale

The Securities and Exchange Board of India (Sebi)'s decision to require a minimum of 25 per cent public shareholding for government companies translates into around Rs 60,000 crore (Rs 600 billion) in divestments in the next three years. 

Shares of the affected companies have been under pressure, since offerings are expected to be made at a discount.

Business Standard looks at the top five public sector companies (accounting for 80 per cent of the total stake sale) and the three-year outlook for these as the share sale overhang.

The consensus for most of them is to buy the dip.

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Coal India

There would be about 14.65 per cent divestment by the government over three years. This might not be easy given the opposition the company faces from labour unions.

On the other hand, the expectation of public sector reforms has boosted the stock price by 58 per cent since March.

The government is indeed helping the company achieve environmental clearances and to boost the company's output.

An expected price hike of 10-15 per cent to be undertaken by Coal India would increases realisation by seven per cent in FY15.

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Analysts at Ambit Capital say the new government's key policy focus for coal sector would improve the company's production and efficiency.

They expect Coal India's margin to increase from 23.2 per cent in FY14 to 26.1 per cent in FY15 versus an earlier estimate of 23 per cent. 

In short, expect volatility around the stake sale but a good company to hold if you are willing to ride out the storm.

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NMDC

The government will have to divest five per cent stake in NMDC over three years, which will not be too difficult.

The company has been benefiting on the volumes front, aided by strong demand and production ramp-ups.

Even soft international iron ore prices are being mitigated by domestic demand which is likely to remain robust.

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Out of 28 million tonnes per annum (mtpa) of steel capacity being added in FY14-16, seven mtpa have no captive iron-ore supplies which will be positive for NMDC, say analysts.

The company's steel plant is also likely to come on stream by FY17. And there is a huge cash, (as well as strong cash flows) to fund future growth and pay dividends to shareholders.

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SAIL

The stake sale might not be a significant overhang, since it only works out to be five per cent of the company's market capitalisation.

Also, improving the earnings outlook over the next two years will be supportive of prices.

Steel Authority of India (SAIL) has made several efforts in the recent past, including a significant increase in capacities, bring down costs and improve mix towards value-added products.

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While the Street feels these measures may take time to have an impact, given that an improvement is dependent on a recovery in steel prices and demand from user industries; they will eventually help enhance earnings over the next few years. 

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NHPC

The possible value of a stake sale works out to almost 11 per cent of the current market capitalisation of NHPC.

Considering the size of stake sale as well as a lack of appetite for hydro power projects and the company's history where it under-delivered both on operating performance and return on capital, it is quite possible that stake sale might face hurdles.

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The company is lacking growth because most of the projects have run into huge delays.

If its stake sale comes in one-go that will be a big overhang on share prices because of the market's fear of an oversupply of shares.

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Neyveli Lignite

In the case of Neyveli Lignite, the government will have to sell a large stake of 15 per cent.

This could certainly have negative implications on the share price, particularly given that the stock is less liquid. However, the company has delivered consistently.

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There is strong demand in user industries and the company has huge lignite reserves to run its power generation plants. The company is expected to do particularly well, given the fuel shortage for power companies.

It is also expected to benefit from forward integration and the expansion of its power capacities. The price could dip at the time of the stake sale but this should be seen as an opportunity to enter or add to existing positions.