IPOs of core sector PSUs have performed poorly since 2007   

November 29, 2010

Among the public sector plays that have hit the primary market in the past four years, banking and finance companies have clearly emerged trumps. Other PSUs have not done as well

Initial public offerings (IPOs) by public sector undertakings (PSUs) are coming thick and fast. Just a few weeks ago, Coal India raised Rs15,000 crores. Now Manganese Ore is raising Rs1,250 crores. There is a lot of interest and excitement about these issues. But have they delivered great returns? Yes, but only those that are in the banking and finance business.

Investors who have bet on the IPOs of manufacturing and service businesses of PSUS have not had great success.
Since 2007, nine PSUs have made their debut on the national bourses. Most prominent among these are companies in core industries of the economy-Oil India, National Hydro-electric Power Corporation (NHPC), Coal India, Power Grid Corporation. However, apart from Oil India, the others have performed poorly since listing day.

The worst performer in this category is NHPC, which has tanked 24% since its debut in September 2009. It listed at Rs39 and is now languishing at Rs28. Satluj Jal Vidyut Nigam (SJVN), another hydro-power company, is trading 19% lower than the price it listed at (Rs28) in May this year. The stock prices of Power Grid Corporation and Coal India have not been able to maintain their momentum, trading only 4% and 9% higher from their listing prices. Only Oil India has put up a solid show, having delivered annualised gains of 29% since debut.

Meanwhile, the stocks of PSUs that have done very well are finance and banking companies, a segment that has clearly dominated the markets over the past few years. Power Finance Corporation, the state-run power sector financing company, has enjoyed a fabulous run since its opening on 23 February 2007. The stock, which was listed at Rs104, is now trading at Rs313-a solid annualised gain of 34% over the period.

Rural Electrification Corporation is another financing company that has proved beneficial for shareholders. This Navratna company, whose objective is to finance and promote rural electrification projects, has witnessed a spike of 41% since its debut on 12 March 2008. After listing on the bourses at Rs125, the stock now trades at Rs316 in the open market.

Banking stocks have been at the forefront of the stock market rallies of late. Not surprisingly, stocks of public sector banks (PSBs) that took the IPO route in the past three years have turned in stellar performances on the bourses. United Bank of India, which got listed at Rs77 in March this year, has since yielded gains of 55%. Similarly, Indian Bank and Central Bank of India (both hit the primary market in 2007) have witnessed annualised gains of 28% and 12% respectively, over the listing price.

One reason for this great stock performance is that Indian banking and finance companies were in a sweet spot for the last few years. Low interest rates and a steady demand for loans ensured that banks have enjoyed volumes as well as interest spreads. As long as this happy situation continues, PSU banking and finance companies will make money. However, investors chasing the IPO rainbow with PSUs will have to think twice before they extrapolate the performance of a PSU finance company to a PSU core sector manufacturing company. — Moneylife Digital Team