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India Equity Research Reports, IPO and Stock News
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Strategy
Choices matter in life and divestment both. Given the market’s concerns about
alternative forms of divestment including mutual sale and purchase of shares (crossholding)
among Government-owned companies, we revisit the previous case among oil
& gas companies in January 1999. As highlighted in our November 4, 2011 report titled
Desperate times, desperate measures, cross-holding is a highly retrograde step.
Buybacks and dividends may be more acceptable than a cross-holding exercise.
Various choices at various junctures for everything in life, including in divestment
In our view, the market would prefer buybacks and cash dividends in lieu of proposed divestment
of Government-owned companies in order to meet its stated divestment target of Rs400 bn.
Exhibit 1 gives cash balance (net cash) of 10 large PSUs in the coal, energy and power sectors.
High Government ownership in Coal India and ONGC will also result in modest ‘leakage’ to
minority shareholders in the case of buybacks or dividends.
Cross-holding would be a highly retrograde step
We see low merit in cross-holding as a way of extracting cash from cash-rich PSUs. Even if the
cross-holding, if any, is between companies in similar industries, we see no merit in Government
companies owning stakes in each other, especially strong companies such as Coal India, NTPC or
ONGC. In our view, the cash of the aforementioned companies can be better used for enhancing
India’s energy security. As has been the case in the previous such cross-holding exercise, the
investments will likely remain as investments in the books of the acquirer companies.
A more systematic approach to divestment would help
In our view, better articulation of the Government’s vision and strategy and implementation of
clear policies in various sectors such as coal and energy (particularly with respect to subsidy-sharing
arrangement in the oil sector) can lead to substantial amounts of money being raised from the
market (see Exhibit 2 that gives a hypothetical exercise about the funds that can be raised from
5-10% divestment in various PSUs). The game is not about one-time divestment but about
using the market more efficiently to successfully raise funds for meeting other social and
development goals.
Twist in the tale—GAIL, IOCL and ONGC did make a lot of money as a result of cross-holding
Exhibit 3 shows the performance of GAIL, IOCL and ONGC stocks from the date of the crossholding
exercise (January 1999). The companies have made decent returns on their investments
(see Exhibit 4). We do not present this as a case for cross-holding but highlight that cross-holding,
if implemented, may not be a completely wasteful exercise as the market fears given the
depressed valuations of companies in general. Nonetheless, we prefer a normal divestment as
highlighted above followed by buybacks and cash dividends.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Choices matter in life and divestment both. Given the market’s concerns about
alternative forms of divestment including mutual sale and purchase of shares (crossholding)
among Government-owned companies, we revisit the previous case among oil
& gas companies in January 1999. As highlighted in our November 4, 2011 report titled
Desperate times, desperate measures, cross-holding is a highly retrograde step.
Buybacks and dividends may be more acceptable than a cross-holding exercise.
Various choices at various junctures for everything in life, including in divestment
In our view, the market would prefer buybacks and cash dividends in lieu of proposed divestment
of Government-owned companies in order to meet its stated divestment target of Rs400 bn.
Exhibit 1 gives cash balance (net cash) of 10 large PSUs in the coal, energy and power sectors.
High Government ownership in Coal India and ONGC will also result in modest ‘leakage’ to
minority shareholders in the case of buybacks or dividends.
Cross-holding would be a highly retrograde step
We see low merit in cross-holding as a way of extracting cash from cash-rich PSUs. Even if the
cross-holding, if any, is between companies in similar industries, we see no merit in Government
companies owning stakes in each other, especially strong companies such as Coal India, NTPC or
ONGC. In our view, the cash of the aforementioned companies can be better used for enhancing
India’s energy security. As has been the case in the previous such cross-holding exercise, the
investments will likely remain as investments in the books of the acquirer companies.
A more systematic approach to divestment would help
In our view, better articulation of the Government’s vision and strategy and implementation of
clear policies in various sectors such as coal and energy (particularly with respect to subsidy-sharing
arrangement in the oil sector) can lead to substantial amounts of money being raised from the
market (see Exhibit 2 that gives a hypothetical exercise about the funds that can be raised from
5-10% divestment in various PSUs). The game is not about one-time divestment but about
using the market more efficiently to successfully raise funds for meeting other social and
development goals.
Twist in the tale—GAIL, IOCL and ONGC did make a lot of money as a result of cross-holding
Exhibit 3 shows the performance of GAIL, IOCL and ONGC stocks from the date of the crossholding
exercise (January 1999). The companies have made decent returns on their investments
(see Exhibit 4). We do not present this as a case for cross-holding but highlight that cross-holding,
if implemented, may not be a completely wasteful exercise as the market fears given the
depressed valuations of companies in general. Nonetheless, we prefer a normal divestment as
highlighted above followed by buybacks and cash dividends.
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