In the interim budget, the government set a goal of raising Rs 50,000 crore through divestment, monetisation of public assets, and capital receipts for the financial year 2024-25.
As the Indian equity market surges to unprecedented highs, market players see a great opportunity for the government to divest stake in public sector undertakings (PSUs) to meet its ambitious fiscal targets.
In the interim budget, the government set a goal of raising Rs 50,000 crore through divestment, monetisation of public assets, and capital receipts for the financial year 2024-25. This target was a first shift away from specific divestment targets, aiming for a more gradual approach.
“This is the best time for the government to divest stake in PSUs with the amount of money coming into the equity market. There is enough demand in the market to easily absorb whatever stake is divested,” said DP Singh, joint CEO at SBI Mutual Fund.
PSU stocks have been riding a wave of confidence, driven by government focus on infrastructure, manufacturing, and capital expenditure. The BSE PSU index has soared 35% so far in 2024, outpacing the benchmark Nifty 50, which has gained 8% in the same period.
The PSU sector has been a significant wealth creator in recent years. The market capitalization of the BSE PSU index has climbed to Rs 67.62 trillion, of which public shareholders hold Rs 20.63 trillion as of June 21.
On June 20, capital market participants urged Finance Minister Nirmala Sitharaman to divest some stake in low float PSU stocks, pointing to valuation bubbles. A low public float means limited supply, leading to a demand-supply mismatch that can inflate stock prices with even modest buying activity.
“The markets are at all-time highs, and it makes so much more sense for the government to monetize its stake in PSUs to continue its fiscal glide path and even increase the target,” said Dhiraj Relli, MD & CEO of HDFC Securities. In the past two weeks alone, the Nifty 50 index has hit new record highs on seven out of nine trading days.
Despite missing its divestment target for four consecutive years, market participants anticipate a high target of Rs 50,000-55,000 crore in the upcoming Budget 2024-2025.
“It remains to be seen if the government will achieve its divestment target after missing it in the past several years, and take advantage of the euphoria surrounding PSU stocks and increase stake sale, through a mix of OFS and ETFs,” said Kotak Institutional Equities in a report.
In FY24, the Department of Investment and Public Asset Management (DIPAM) raised Rs 16,507 crore in disinvestment receipts, falling short of the already lowered target of Rs 30,000 crore. These included smaller stake sales of Coal India, SJVN, Housing & Urban Development Corporation of India, IREDA, Rail Vikas Nigam, and IRCON International.
Some larger strategic sales of public sector enterprises such as IDBI Bank, Shipping Corporation, NMDC Steel, BEML, and Container Corporation, which were delayed due to market conditions, could capitalise on the current rally. Market experts also foresee stake sales in sectors such as power and capital goods, where valuations have surged.
Kotak Institutional Equities expects that large divestments, particularly in stocks trading at high valuations, may reveal the true value of PSU stocks. “In our view, most of the PSUs are extremely overvalued and their current stock prices do not reflect their fundamentals,” the brokerage house said.
Experts say these stretched valuations pose a potential risk of a market crash, reminiscent of the one seen on the election result day. “When valuations are so stretched, any event affecting investor confidence, such as earnings result or political instability, could trigger a higher than expected correction,” said Souvik Saha, Investment Strategist at DSP Asset Managers.
If the market turns later in the year, the government could risk missing another divestment target, said market participants.
Source:financialexpress.com