Before going public, PSUs need to offer clarity on their future plans

As reported by this paper, the government is likely to get more aggressive with its divestment programme. A number of IPOs are expected as early as next month, among them of three railways PSUs — Rail Vikas Nigam, Indian Railway Finance Corporation and Ircon International. Also on the cards are offers for sale or follow on public issues — of up to 10 per cent of their capital — in companies like Hudco, NTPC, NBCC, MMTC, Hindustan Copper, NMDC and Bharat Electronics. The IPOs of the railway companies is a step in the right direction. The Indian Railways is one segment of the Indian economy which has the least amount of paper floating in the equity market. There are very few companies involved with railways from the private sector that are listed. The ones that are listed do not have large enough balance sheets to attract major investors. A recent issue of RITES that got listed last month is among the few stocks that are quoting above their IPO prices. So, the appetite for paper from the Indian Railways is likely to be high which suggests the coming issue could get a good response.

­However, there is one matter that policymakers need to address: Does the IPO bring anything to the table for investors. As far as the government is concerned, the IPO will help meet divestment targets but does investing in the IPO mean any higher probability of gains for investors. If the answer is yes then it should go ahead with the IPOs; if it is no, then it ought to wait for the situation to improve. Such an assessment is important as in the past, some PSU stocks underperformed in the market after IPOs and the situation did not improve for years. In the long term it is the government which is the loser because when a PSU stock gets listed, the biggest investor is the government. If the retail investor does not earn, the government will not create wealth for itself either.

Let us take the case of HUDCO. At the time of its IPO, the price band was set at Rs 56 to Rs 60 per share. It got oversubscribed 80 times, probably one of the highest in history of listed PSUs. But it is quoting at Rs 55 now, which is below its IPO price. Retail investors who thought that housing finance companies were a good bet and held on to their stock are now cradling their losses. When the government comes out with follow on public offer of 10 per cent equity for HUDCO, as reports suggest it will, the government will be the biggest loser. There are two reasons why this will be so. First, it will not get the kind of response it got in the IPO as investors have not made money in the company. So, one cannot rule out the possibility of state-owned entities being asked to pump in money which is not divestment but an accounting entry. Second, the valuation it will get in the FPO will not be higher than what it got in the IPO. The situation could have been salvaged had HUDCO, after its IPO, come out with a clear-cut plan on its growth plans. What matters for valuations is that street expects clarity on an aspect of business. So, before bringing any IPO, there should be clarity on plans. Policymakers need to understand that valuations of companies can be done on the basis of so-called mathematical model only in books. Actually, perception about a company and its management plays a very critical role in the valuation process. So, before taking them public and also after they go public, PSUs need to offer clarity on their future plans.