Zee Research Group
Having received a decisive mandate, the world expects Modi to shun singles and doubles to focus on some lusty big hits! But does Modi have the legroom to do so?
While pundits slog it out over how much space the outgoing government has afforded the new Prime Minister, a clear window of opportunity exists for him in long overdue divestment of the public sector enterprises.
The unprecedented buoyancy in stock market offers the new government the immediate opportunity to actually score big gains.
The Indian stock markets are in robust state as foreign institutional investors (FIIs) have been pumping money since the time Narendra Modi was declared the BJP`s prime ministerial candidate. The clear verdict has only bolstered the prospects of a sustained bull run.
This makes a strong case for better realisations for the government from stake sale in PSEs. The new government can easily raise an amount ranging from Rs 65,604 crore to Rs 1.13 lakh crore if they divest up to 5-10 per cent stake in the top 10 PSEs (in terms of market capitalisation).
This money can either be utilized in reviving the economic growth or bridging the revenue shortfall.
Zee Research Group (ZRG) has selected top-10 most valued PSU companies incorporated in S&P BSE PSU Index for the analysis. ZRG has created three scenarios where government might divest 1) 5 per cent stake 2) 10 per cent stake 3) mix of 5 and 10 per cent stake.
The possible list of candidates also includes banking heavyweights like State Bank of India (SBI) and Bank of Baroda. As per the recent report of Reserve Bank of India (RBI) panel, the government should cut its holding in public sector banks to below 50 per cent. However, the ZRG analysis provides for the disinvested entity to be yet a government company with it holding more than 51 per cent stake post the sale.
Interestingly, since 13 September, 2013, while Sensex has generated returns of 25 per cent, average returns generated by the possible candidates are 57 per cent.
In scenario 1, the top 10 PSUs in which the government can divest 5 per cent stake are: ONGC, Coal India, SBI, Bank of India, NTPC, Indian Oil Corporation, NMDC, Power Grid Corporation, Bharat Heavy Electricals Ltd, GAIL (India) Ltd and Bank of Baroda (BOB). If the said stake sale happens in the possible candidates at the current market price (CMP) then the government may fetch Rs 65,604 crore.
Similarly, in scenario 2, the top 10 PSUs in which the government can divest 10 per cent stake are: ONGC, Coal India, NTPC, Indian Oil Corporation, NMDC, Bharat Heavy Electricals Ltd, Power Finance Corporation, Oil India, SAIL, and REC. If the mentioned stake sale happens at CMP then the government may collect Rs 1.10 lakh crore.
Likewise, in scenario 3, the top 10 PSUs in which the government can divest either 5 per cent or 10 per cent stake are: ONGC, Coal India, SBI (5 per cent), NTPC, Indian Oil Corporation, NMDC, Bharat Heavy Electricals Ltd, Power Grid (5 per cent), GAIL (5 per cent), and BOB (5 per cent). If the stake sale happens at CMP then the government may get Rs 1.13 lakh crore.
Historically, the disinvestment target announced in the Budget has been consistently missed by the respective ministers. For instance, during the UPA-II regime, barring 2009-10 (when no target was fixed), targets were set up for all the remaining four financial years. However, these targets were never met.
In the last fiscal 2013-14, the government could not meet its disinvestment target owing to the weak economic scenario. The original estimate announced in the budget was Rs 40,000 crore but it could realise only Rs 15,819.45 crore.
In the last few years, it has been witnessed that stake sales in PSUs have been a big source of revenue for the government. Corroborating the view, a CLSA report stated, “During the previous NDA rule (1998-2004), total disinvestment proceeds were around USD5.5bn for the Government of India, including wholesale disposal of PSUs to private parties. Since then, over the last 10 years, total disinvestment has been around USD21bn, though most of it via the stake sale in equity markets.”
“An NDA government under Mr Modi will follow a different approach as he has stated that he believes PSU performance can be improved by empowering the management. Successful examples of the same are found in Gujarat state PSUs, which have the highest profitability across India. A potential turnaround for central government PSUs could work wonders for some of them. PSU banks also stand to benefit if the banks are allowed to work without political interference and are made more efficient through technology upgradation,” CLSA added.