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Add PSU stocks to your portfolio

Monday, October 25, 2010

About three years back the Reliance Power IPO (Initial Public Offering) ignited the IPO market with the issue receiving massive oversubscription. Post issue the stock markets witnessed a sharp fall.

Now it is the turn of the Coal India IPO to mimic the Reliance Power except for the fact that we do not see a sharp fall in the stock market post issue. Size wise the IPO of Coal India was the largest in the history of the primary market with the size at over Rs 15,000 crore compared to over Rs 11,000 crore for Reliance Power.

Coal India’s IPO drew bids for at least Rs 2.3 lakh crore or $ 54 billion. Janus Capital, Fidelity, Franklin Templeton and Capital International led overseas investor’s bids while SBI, ICICI Bank and Life Insurance Corporation topped the list of domestic institutions. With this offering investors are of the view that that the government has learnt to price issues leaving scope for investors to get listing gains.

Coal India joins the league of top state run companies in the world such as China’s Agriculture Bank that sold $22 billion worth of shares and Brazil’s Petrobas that raise $ 70 billion. Companies in emerging economies are drawing record funds as investors in developed markets are unable to secure the returns that some of the emerging markets can provide. Most developed economies have not seen any major pick ups and are growing at a slow pace compared to some of the emerging markets.

Investors are looking forward to the forthcoming follow-on issues of Power Grid, ONGC, Indian Oil, SAIL etc as they expect the pricing to be attractive leaving scope for listing gains.

State run companies have been outperforming the market with the BSE PSU Index gaining twice as much when compared to the Sensex over the last three years. However it should be noted that PSU’s remained under priced for a considerable period of time and eventually the re-rating had to take place as several PSU’s are well managed and are performing exceedingly well. In fact Maruti Suzuki has emerged as a multi bagger.

Even at current levels there are several PSU’s which appear attractive for investment With the massive response for the issue of Coal India it is expected that the pricing will be at the top end of the band i.e. Rs 245 with retail investors getting a discount of 5%.
Once listed Coal India will emerge as the biggest listed Coal producer in the world.

Subsequent to listing and during market corrections it would be an opportune time for investors to gradually acquire the stock of Coal India as it would be a must for every portfolio. The shares of Coal India are to be listed on the Stock Exchanges on November 4, 2010.

Slowing dragon
The Chinese economy at last is witnessing a slow down. During the September quarter the Chinese economy expanded at the slowest pace in 12 months. A report of the World Bank suggest that the pace of growth in China would slow down further in 2011 raising the possibility of India emerging as the fastest growing power house in the next year.

Also faced with a 23 month high inflation and growing pressure from the rest of the world to let its currency appreciate, China faces several head winds to growth.

With weak global growth and fading impact of the stimulus package growth is projected to slow down to 8.5% in 2011.

There are expectations that going forward India would overtake China’ growth rate in the next three years.

The Chinese central bank raised the benchmark interest rates by 0.25% to 2.25% last Tuesday after nearly three years to rein in prices and inflation which touched a 23 month high of 3.6%. The Chinese government earlier in the year had set a ceiling for inflation level at 3% and had predicted that inflation would moderate in the second half of the year.

Its biggest worry however would be the growing global friction over currency values and calls for china to let the Yuan appreciate and address the large surplus it runs with other countries for better distribution of growth.

China’s challenge would be to change the structure of the economy from an export driven to a consumption driven economy wherein it becomes less prone to external shocks in demand.

On the Indian economy is in robust health growing at a brisk pace and what is heartening is that unlike China India is less prone to external shocks as its economy is largely consumption driven.

In view of these developments there are huge inflows of funds from foreign investors who have till date pumped in around $ 22 billion and that is one of the reasons why markets are are witnessing a perpendicular rise delaying the much expected correction The announcements of second quarter results from some of the IT companies have been a mixed bag with some companies beating street expectations while some disappointing.

Both the majors Infoys and TCS beating street expectations while the other major in the form of Wipro disappointing.

Though the appreciating rupee and the protectionist policy adapted by the US is a cause for concern the big IT companies continue to give positive guidance and are confident about the long term prospects though short term concerns may remain and have to be weathered. Investors can continue to look at companies like Infoys, HCL Tech and even Wipro though the results have slightly disappointed.



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