Editorial: Selling the PSU dream

Mar 19 2014, 02:59 IST
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SummaryReduce subsidy burden, give operational freedom

The stock markets are on a roll with the latest opinion polls predicting 229 seats for the NDA and foreign flows of close to $2 billion coming into Indian stocks in the last 23 sessions—on Tuesday, the Sensex hit a lifetime high in intra-day trade. Foreign investors, it seems can’t get enough of Indian stocks. The backdrop, it would seem is perfect for the launch of the 10-stock CPSE ETF, a scheme through which the government is hoping to raise R3,000 crore. It is true that a stable government at the Centre could drive up the markets to further highs—and a rising tide as they lifts all boats. However, the stocks that tend to benefit in such a rally are typically the cyclicals—banks and autos, for instance—and sectors like capital goods where companies are expected to win bigger orders as investments pick up.

A glance at the recent rally shows that it is many of these stocks—a Larsen and Toubro, for example—that have done well, having underperformed earlier. Stocks of PSU banks have seen a surge whereas less than two months ago SBI was struggling to attract

R9,000 crore. If the markets rally on investors would presumably like to bet on a broad basket of stocks than punt on one or two. The CPSE ETF, however, offers a very restricted play since it is weighted heavily in favour of energy with ONGC’s share at 26.7% OIL and IOC at about 7% each and GAIL with 18.5%; it’s hard to see appetite coming in for a scheme with a 60% weight for energy. Also, in the last one month, while the Sensex has gained over 7%, ONGC has gained more than 17% to climb to the current levels of R325. There’s no doubt that diesel deregulation, which started in January 2013, will continue but ONGC’s subsidy troubles can’t be wished away; as Kotak Institutional Equities estimates, the oil explorer will foot a bigger subsidy bill of an estimated R55,600 crore in FY15 compared with an estimated R54,000 crore in FY14. Moreover, much of the upside from higher gas prices of $7 per barrel that ONGC will earn from April 1 appears to be priced into the fair value of R343. As for Coal India Limited, the stock has seriously

underperformed the markets in the past one month on concerns that output this year will fall short of the targeted 481

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