Bharat-COIN could be the answer to Modi's divestment blues


By Harish Krishnan

Is it possible that the government raise somewhere over 1% of GDP, which it can invest upfront without significantly impacting the cost of capital for the economyRs

We evaluate one such avenue, which is divestment of PSU companies (ex-PSU banks).

From FY14 till so far in FY20, the government has netted about Rs 3.18 lakh crore ($45 billion) through various divestment programmes. To put it in perspective, the government has infused close to Rs 3 lakh crore in PSU banks since FY14. Over the last six years, (CY14-CY19), total MF+Insurance+FII flows aggregate to about $150 billion, $45 billion going to these PSU companies has been a massive 30% of total flows, and the incessant selling has meant that PSU index has returned -16% (BSE PSU ETF) compared to almost 50% rise in Nifty (December 2014 to December 2019).

The residual government stake is now worth Rs6.87 lakh crore, and if the government has to continue maintaining 51% stake in these companies (in some cases, to maintain sovereign borrowing profile), the residual government stake is only worth Rs1.2 lakh crore. With divestment targets of over Rs1lakh crore, this residual stake can at best last another year. Recognising this, the government has chosen to put a few companies on strategic divestment. This is an essential reform, and success in executing BPCL, CONCOR, SCI and Air India can set a template for government to unlock value in lot of these companies and bring about better capital allocation and efficiency for the country.

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However, not all PSU companies need to head this way. There are companies in energy, power, minerals, and defence sector that are vital strategic interests. Is there a win-win approach that can satisfy government finances, minority shareholder interest and management reform while still maintaining more than 51% stake in these companies?

INTRODUCING BHARAT-COIN

Bharat-COIN is a loose acronym of nine PSU behemoths – Coal India, ONGC, IOC, NTPC and other companies such as Bharat Electronics, HAL, Power Grid, GAIL, NMDC. These nine companies account for more than 50% of government stake in listed PSU (ex banks) and account for 75-80% of dividend given by listed PSU in the last six years.

The residual value of stake left for divestment in these nine companies, should the government retain 51% stake, is approximately Rs50,000 crore. These companies gave a dividend of Rs40,000 crore in last five years on an average, and government stake netted it about Rs25,000 crore (not considering taxes on dividend).

We propose a holding company of these nine diversified businesses. Given the large dividends they pay, assume a debt structure on lines of REIT/LRD, where dividends of Rs25,000 crore is capped at say, 8%. An 8% coupon, with 10 year principal repayment on this dividend pool can raise about Rs3 lakh crore.

We think there will be five broad benefits with such a structure.

1. Selling pressure on PSU stocks abate — PSU companies have seen massive erosion of value, primarily on account of this incessant selling. For these 9 companies, residual government stake now is Rs3.6 lakh crore. If we consider that these companies will reflate to levels seen at their peak in the last five years, this residual stake rises to Rs6.2 lakh crore. This reflation is not a small number, but can provide government with meaningful maneuverability later (say in international M&A etc).

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2. Diversified dividend pool and alignment of minority investors – Given that the coupon will primarily be serviced out of dividend, it is imperative that this pool be diversified and can continue to grow. The key is to announce to the market that these companies will aim to grow their profit pools. Over the last five years, the profit pool of these 9 companies have grown at 6%. As a theoretical exercise assuming that dividend pools also grow by a similar 5% over the next decade, the excess dividends over 10 years works out to about Rs60,000 crore.

3. Reduce the crowding out of equity flow by divestment — The poor investment climate in India Inc is exacerbated by the massive balance sheet deleveraging that India Inc is doing along with its banking system. As noted above, over the last five years, almost 30% of all institutional monies have gone in divestment programme. Through Bharat-COIN, the idea is to free up the equity flows as it targets the debt flows. This also has potential for leveraged capital structures to participate in such offerings, further improving velocity of money.

4. Now coming to repayment of principal in 10th year — We see three avenues of payment of principal. One – as the stake of government reflates at least to value seen in the last 5 years, the residual stake of government that they can disinvest (assuming they don’t let it fall below 51%) still rises from Rs50,000 crore to about Rs100,000 crore. Secondly, the extra dividend streams above the coupon (assuming 5% growth in dividend pools) totals to about Rs60,000 crores. This still leads to a shortfall of around Rs140,000 crore to be built up over 10 years. This can be made up by investing Rs11,000 crore every year over the next 10 years, assuming an investment return of 5%. However, these calculations are more academic. Most invariably, once a structure gains confidence that the coupon can continue to be serviced, the principal can be refinanced without any issue.

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5. It may help to have multiple carve-outs of the PSU holdings (say IOC+ONGC as anchor in one year along with other PSU, NTPC+ Coal India in another year) etc, so as to better design this product after seeing initial response from market participants.

In an environment, where corporates are not releveraging, and household consumption sentiment in the near-term is impacted, government’s ability to re-leverage its assets will help improve the economic activity.

(The author is senior V-P & fund manager (equity) at Kotak Mutual Fund)





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