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Thursday, 16 January 2014 00:00
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Forget the PSU ETF or getting ONGC/OIL to buy IOC

Going by the performance of the 11-scrip PSU Exchange Traded Fund (ETF) that the finance ministry is planning—FE put together the hypothetical ETF on the basis of the market cap of PSUs chosen for the index—even the most hardened investors would baulk at investing in it. Over the last one year, while the Nifty delivered an 8.5% return, the ETF lost 6.5% of its value. In which case, getting anywhere near the R3,000 crore being targeted from this looks difficult. Cherry-picking PSU stocks like ONGC or IOC won’t help much either since government policy is likely to worsen their finances—while removing the LPG cap or allowing state transport undertakings to buy diesel at subsidised rates will hit ONGC the most, changing oil pricing to export-parity levels will badly hit IOC’s margins. Which is why IOC, for instance, has lost so much value, from R305 per share in May last year to R195 in early January. While this is the reason why the government is not going ahead with the IOC divestment that was expected to fetch it R10,000 crore, Plan B—to get an ONGC or an OIL to buy the stake—is a bad idea. For one, the stock is likely to lose value if the government’s current plans are anything to go by. Two, while OIL has cash reserves of R13,000 crore and barely spends a tenth of that on capex, ONGC’s cash position is weaker—it has around R10,000 crore of cash but needs thrice the amount to fulfil its capex plans.

Given that the government has got over its hesitation about selling the SUUTI shareholding in Axis Bank, and the AG has given the go-ahead for the HZL residual share sales, it would be a better idea to look at selling more SUUTI shareholdings in companies like ITC and L&T—the Axis shares are worth R13,000 crore, ITC R30,000 crore and L&T R7,500 crore. There’s a lot more money to be got here and a lot more investor appetite.


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