Auction route to divest PSU stakes – A major trigger for wealth creation

It is reported that the government is planning auction route to divest the stake in one of the mid-sized public sector undertakings (PSUs) engaged in the dredging business. Auction route would bring out the true potential in the value of PSUs by promoting healthy competition among the entrepreneurs. It is also for the first time after a couple of decades the government has proposed to go for strategic stake sale in several mid-sized PSUs like BEML, Dredging Corporation, Shipping Corporation of India, etc.

The non-tax revenue of the government is likely to grow at slower pace in the current fiscal due to the fall in revenues from the telecom sector. The Department of Telecom expects its revenue to decline by as much as 38% to Rs 29,534 crore for FY18 from the earlier estimate of Rs 47,305 crore on account “severe financial stress” and a “rapid decline” in earnings of the telecom operators.

As the telecom sector is one of the major sources of non-tax revenues for the government, the fall in the non-tax revenues is likely to be compensated by maximising the revenue generation from the PSUs through divestment of stakes as well from special or hike in normal dividends. For FY17, the government budgeted a total dividend income of Rs 53,883 crore. However, it ended up with realising 43% higher at Rs 77,050 crore (revised estimates). Like FY17, the government could also end FY18 with the total dividend income much beyond the initial budget estimate of Rs 67,529 crore for FY18.

There are several PSUs in the mid-sized business segments that hold rich assets in the form of real estate assets and mines. Some of them still hold huge cash on their balance sheets. As the government has already committed to fiscal discipline and fall in the revenues from the telecom sector is quite inevitable, it is possible that the government would extend the list of mid-sized PSUs for stake sale in the current year itself. It is worth noting in this regard that Hindustan Zinc, which was a mid-sized company, saw its market cap rise 50 folds in the following two decades after the government divested its majority stake in favour of the private sector in 2000.

Hence, the mid-sized PSUs engaged in non-sensitive businesses, which also offer valuation comforts, could be the hunting ground for wealth creation for the retail investors – they can unlock true potential asset values through auction route of divestment and also can bring in steady appreciation in their market caps in the longer term through involvement of more efficient private managements.

The writer is founder and managing director, Equinomics Research and Advisory