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Not necessary to invest in public sector IPOs

Source : BUSINESS_STANDARD
Last Updated: Wed, Sep 26, 2012 20:12 hrs
An employee works on electric pylons at a power station in Greater Noida

Public sector enterprises are considered safe investment options for retail investors. It is mainly because these are owned by the government, which means these are trustworthy.

Last week, the government announced a list of companies in its divestment programme for the current financial year. The government plans to mop around Rs 15,000 crore for the current financial year through its divestments. The government announced it was planning to divest stake in SAIL, Nalco, Oil India, Hindustan Copper and MMTC.

So, you must be wondering whether it’s a good idea to put aside some money to invest in these PSU issuances. Prithvi Haldea, chairman and managing director, Prime Database, says whether or not to put aside money for the upcoming PSU divestments will depend on the pricing of the issues. “If the pricing is done right, then it will make for a good investment opportunity,” says Haldea.

The last few follow-on public offerings (FPOs) of PSU did not find much favour with retail investors due to their aggressive pricing. FPOs of NTPC and REC (in 2010) were subscribed 1.2 times and 3.12 times, respectively. And retail subscription in FPOs was 0.22 times for REC and 0.06 times (retail and HNI combined) for NTPC.

Marketmen said retail investors stayed away from these FPOs as these were priced at a discount to their market price of just eight per cent or so. For retail investors, the secondary market makes more sense as the discount of floor price to market price is not significant.

REC’s floor price was Rs 203 and during the issue period the share price ranged between Rs 215.65 and Rs 210. While NTPC’s floor price was set at Rs 201, the share price ranged between Rs 211.65 and Rs 203.05 during the issue period.

So, one should look at the discount of the issue price to the current market price of the stock. The larger the discount the more attractive it is, says Vishal Kapoor, director & head (wealth management), Standard Chartered Bank. “If the issue price is closer to the current market price then it does not call for one to invest in the issue. You might as well buy the scrip from the secondary market during the issue period. An FPO is more attractive when there is a larger discount to the current market price,” adds Kapoor.

These issues had also come at a time when markets were volatile. Of the PSU issues that hit the market since 2010, only Power Grid and Engineers India had managed to garner respectable interest from investors.

NOT SO FAVOURABLE
Name
IPO/FPO
Issue size 
(Rs lakh)
Issue price 
(Rs)
Listing day 
closing price (Rs)
Current market 
price (Rs)
NMDC Ltd FPO 996,730 300 285.15 189.60
NTPC Ltd FPO 847,875 201 205.10 166.45
Rural Electrification Corp Ltd FPO 352,994 203 241.45 230.85
MOIL Ltd IPO 123,751 375 465.05 260.05
Power Grid Corp of India Ltd FPO 744,234 90 96.55 118.10
Shipping Corp of India Ltd FPO 116,473 140 132.60 57.10
SJVN Ltd IPO 106,251 26 25.10 19.65
Engineers India Ltd FPO 95,935 290 333.35 229.85
Coal India Ltd IPO 1,519,944 245 342.55 369.75
ONGC Auction 1,274,950   283.70 287.15
Power Finance Corp Ltd FPO 465,993 203 199.50 199.95
National Buildings 
Construction Corp Ltd
IPO 12,720 106 96.95 102.05
Source: Bloomberg,Departmentof Disinvestments
Compiled by BS Research Bureau

However, it should not just be the pricing alone that should determine your investment decision. Kapoor says one should also look at whether they need more equity in their portfolio. “If you already have overweight equity in your portfolio then there is no need to buy into the FPO just because there is a divestment issue. It is not advisable to do so. And also one should see if you want that particular stock in your portfolio,” advises Kapoor of Standard Chartered Bank.

The risk with investing in any FPO is that if at the time the issue is out, the markets are at high levels, the issue will be priced high. Amar Ranu, associate vice-president (third party products), Motilal Oswal Private Wealth, says one can consider buying scrips of these companies from the secondary market now instead of waiting for the FPOs. SAIL, ONGC and Oil India are traded in the secondary markets.

And, with regard to initial public offerings, other than the pricing of the issue one should also look at the valuations of listed peers, price to earnings ratio, return on equity and the top line and bottom line of the companies before making an investment decision.

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