Saturday, February 7, 2015

Should You Be Investing in the PSU Disinvestments?

Over the past few years, Dis-investments or Share Sale by Government Owned Public Sector companies of India has been a preferred route for raising funds by the Indian Government. Many popular or should I say large & profitable PSUs shares have been sold in the stock market by the Government by the OFS (Offer for Sale) route with a 5% extra discount for retail investors.
Are you one among the many people who are considering investing in such PSU OFS Issues? If so, read this article and share it with your friends.

Should You Be Investing in PSU OFS Offers?

There are many reasons why people are attracted to such PSU Disinvestment options. Some of the key reasons include:
-        They are owned by the government so, they are risk free
-        The 5% extra discount
-        These are profitable companies
-        Everyone else is subscribing
-        Etc…

If you ask me for my One Word Answer to this Question – I would say, NO.
Yes, you read it right, I am saying, No, I would not be interested in subscribing to such PSU Disinvestment Offers. 

You may be wondering, I am crazy but let me explain in detail on the Why part. There are 4 main reasons why I feel, we shouldn't be subscribing to these offers right now…

Reason 1: Just because they are PSU Stocks, it doesn't mean they are Risk free or even Low Risk

Any stock that is out there, being bought and sold on the stock market carries a lot of risk. There is always a chance the price of your stock will go down on any given day. This is not a “Bond” or a “Fixed Deposit” where you can find solace over the fact that the government owns/issues this Bond/Deposit and hence will pay you, no matter what. A Stock/Share is not like a Bond. It has no Intrinsic or Default value.

If you buy the shares of XYZ PSU today at Rs. 300/- per share and it is selling at Rs. 100/- 6 months now, nobody is going to offset your loss of 200 rupees per share.

Reason 2: Timing of the Issues (NOW – In 2015)

Right now, the stock market is riding a wave of momentum fueled by the popularity of our Honorable Prime Minister and the trust the International Investors have on his ability to fuel India’s growth. As a result, our stock markets are at an all-time record high. Yes, many companies have benefited greatly from this Indian Growth Story and warrant the spurt in their stock prices but many more companies are growing (in just stock price) without reasons. With the stock market at the current levels, the room for error is that much lower. Even if there is a 2 or 3% correction in our markets, we will end up with significant losses.

Reason 3: 5% Extra Discount

Yes, the 5% extra discount is a great idea to woo the common/retail investor. I cannot really say anything negative about this except for the fact that, 5% is not that big a deal when you are potentially looking at double digit profit or loss. By keeping your money in your savings account (doing nothing) you can make 4% returns so, this 5% isn’t much of a motivating factor unless we know that the stock we are buying is actually primed to grow…

Reason 4: Everyone else is Buying – The Offers are a Super-Hit

Of the 4 reasons, this is probably the biggest reason why I am skeptical of these issues. If you review the Investment pattern for these PSU Disinvestments, one thing is clear, it is fully subscribed.  However, if you take a step further and look even closely, you will be able to see that another Government Owned PSU (Life Insurance Corporation of India) has been one of the main subscribers to these Issues. LIC bought about 84% of the Issued Shares during the ONGC Disinvestment, similarly it bought about 71% of the shares issued during the SAIL Disinvestment. For Coal India, the % was 45%.

Of course, others too are investing but seeing LIC as the biggest investor for such issues, it is obvious that many of the big investment houses (Esp. Mutual Funds) are staying clear or at least not investing all their money in such issues. As retail investors our threshold for losses or ability to bear losses are very low. A company like LIC can afford to lose 5 crores today and another 5 crores tomorrow but if you or I lose Rs. 50,000 – get the picture??

Some Last Words:

Firstly, I am not saying that we should ignore such PSU Disinvestments altogether. Buying PSU Stocks is a good idea to form a core stock portfolio for the long run. Well Managed Indian PSUs have given superb returns if we consider a 5 or 10 year track record. However, most investors who made a profit are ones that bought when the market was low not when it was at its peak. Secondly, if you are still interested in buying such PSU offers, invest only 5% of your portfolio in each issue. Do not over-expose your portfolio to any particular PSU stock and invest only your long-term savings here. If you plan on exiting in about 1-2 years, then you should stay away.

Hope you found this article useful. If you did, please share with your friends.

Happy Investing!!!

Disclaimer: This is only my personal view of these PSU Disinvestments based on the current circumstances. When the market situation or offer price or any other factor changes, the same may not hold true. Please consider your own personal risk appetite before making investment choices.

No comments:

Post a Comment

© 2013 by All rights reserved. No part of this blog or its contents may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the Author.


Popular Posts

Important Disclaimer

All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.