high premium minimising the chances of a quick return for retail investors

Golden Goose or a Turkey? Potential disinvestment candidates include some of the most profitable PSUs but given the recent experience the IPOs could be at a high premium minimising the chances of a quick return for retail investors KR I SH NA K ANT ET INTELLIGENCE GROUP  THE leading news of the last week was the government's decision to divest its stake in profitable but unlisted public sector undertakings by offering them to the public through initial public offers. The union cabinet also approved a proposal to increase pubic holding in the already listed PSUs to at least 10%. To raise public holding in them to quite a few follow-on offers are expected to come from the already listed and actively traded PSUs.      So will this open lucrative investment avenues for investors or it's just another bit of information without any significant impact on the broader market. If one checks the history of public sector PSUs, investment in the initial public offers of such companies have always been very profitable for investors. For example most of the leading PSUs including State Bank of India, Union Bank of India, NTPC, Power Grid, Power Finance Corporation and Bank of India among others have delivered strong performance since their debut. In fact quite a few PSUs such as BHEL, Punjab National Bank and Engineers India, among others have turned out to be multi-baggers. If you have been smart enough to hold few hundreds shares of any of these companies for last 5-6 years, you no more have to worry over your retirement planning.      So is that a good reason for you to begin saving cash for any of the forthcoming IPOs? Unfortunately there is no easy answer to this. While historically, majority of PSUs have delivered superior returns on the bourses since their debut, the last few IPOs from this stable do not evoke much confidence. One of the main reasons PSUs gave superior returns in the past was because they were priced attractively. Low pricing was part of the government strategy to encourage public participation and maximise their chances of making money. For instance, National Thermal Power Corporation (NTPC) IPO was priced just 10 times its earnings, while PNB shares were sold as just 3x its earnings. The two companies are currently trading at a P/E multiple of 20x and 8x, respectively. This means that the shareholders not only gained from the secular earnings growth in these companies but also profited from their re-rating by the stock market.      In contrast, the last two IPOs from the government stable were expensive compared to the valuations of their listed peers. For instance, NHPC was priced at around 36 times its latest annual earnings, even as NTPC was available for just 20 times its trailing earnings. Similarly, Oil India was priced at a premium to ONGC, even though the latter is nearly 8-9 times bigger than the former. Such a large disparity in size typically demands that former is sold at a discount.      Richly priced IPOs diminish the upside potential for initial investors as is already evident for NHPC shareholders. The stock is currently trading at over 10% discount to its offer price but still one of the most expensive stocks in its sector. But given that, the issue sailed through smoothly notwithstanding the offer price will encourage more PSUs and their investment bankers to extract the maximum price from the shareholders. If this happens to be the case, then retail investors can comfortably give the forthcoming PSUs IPO a pass.      Another interesting feature of an investment in public sector IPOs is that the investment can turn out to be good source of recurring cash flow for the investors. This is because government owned companies are some of the most generous dividend payers on Dalal Street. For instance, during the year ending March 2009, the listed PSUs distributed a total dividend of around Rs 27,000 crore to all shareholders including the government. The amount is more than half of all dividends paid out by all listed companies in India. This is much higher than PSUs' share in the profit of India's top-200 companies at around 40%. This is because PSUs' share a far greater proportion of their profits with their shareholders compared to their private sector counterparts. Typically, government owned companies share nearly a third of their profits with shareholders, the corresponding figure for Indian private sector companies vary from 15-20%.      A simple arithmetic exercise will show that dividend yield falls as the stock price rises. A lower yield means that you will have to pay more price for the same amount of potential dividend income in future. While historically, PSUs offer higher dividend yield the same cannot be said about the recently listed ones. For instance, both NHPC and Oil India offer lower dividend yield than their listed peers –NTPC and ONGC respectively. The message is clear. Given the current environment surrounding IPOs, where they are being pushed at rich valuations, it will be difficult for new PSU offers to generate the returns that their older counterparts delivered.      Does that mean that there is not much for the investors in the forthcoming IPOs from the public sector? Not necessarily. Many of the potential IPO candidates include some of the largest and most profitable companies in their sectors such as Coal India, Hindustan Aeronautics, Rashtriya Ispat Nigam, Airport Authority of India and Ircon International among others. Given their track record, these companies have the potential to deliver handsome returns even if their shares are sold at high valuation initially. Given this, investors need to evaluate every forthcoming IPOs in their merit rather than follow any thumb rule. Having said that, there is no harm in being conservative while investing in IPOs, as there are plenty of good choices available in the secondary market.      krishna.kant@timesgroup.com