Sunday, July 19, 2009
Disinvestment & Valuations.
'Disinvestment'- this was the theme on which speculators played a big bet before Budget announcement. Markets participants has expected some big announcement in lines of disinvestment or stake sale in public companies. In this post, I would like to throw some light on one aspect of PSU stake sale i.e., Valuations of already listed PSU companies on Indian bourses.
Low floating stocks are those stocks where a majority of the stake is owned by promoters and its group, thus limiting the scope of shares open to trading in public. Take, for instance, listed but government owned companies like NMDC & MMTC where the Centre has a whooping over 98% stake in each of these companies. In such companies, the stock in float for retail investors and institutional investors is very low and limited. The stock price and valuations of such companies are based on a low floating stock in public, thus making investment and trading in such stocks susceptible to high volatility and lower average volumes more often than not.
Fluctuation at its most Extreme
Most of the times, fluctuations in such stocks are often locked in up or down circuits based on the flow of news in the respective counters. It is relatively easier to manipulate the stock prices of such counters based on low outstanding shares in float. Such counters can be lifted with little or no institutional support due to low floating stock in public. Usually the charts of such stocks depict a vertical rise or fall during a period or it could as well be in shape of 'Steps' where the stock's chart pattern resembles as if moving on the pre-determined side after every planned phase of consolidation.
Competitiveness & Transparency
From all above, I simply intend say that in selective stocks with low float, the valuations could be on the higher side during times when the news flow is in favour (For example, disinvestment in PSU counters) of the stock. Such stocks could move up on the school of thought that further divestment could enhance the liquidity and volumes for the counter. In stocks, especially, where the promoters are Government, the usual process of thinking that goes into it is that as more stake from government sets free and as private institutions/retail investors gets more hold of the stake in the counter, the management will gradually strengthen, become transparent and be more competitive in nature.
A Slow Process of Price Adjustment
But, the other side to the story could also be that the excess valuations and speculative interest that such counter received till now based on its low float, could somehow become lose the sheen with higher float in the public/institutional domain. However, coming back to NMDC or MMTC where fundamentals are sound, could be a good investment pick for investors but for the excessive euphoria created in these stocks just before the budget announcement.
NMDC which had slumped to Rs.115 at Sensex 8000 levels, had clawed back to Rs.450 until Budget announcement before it settles around Rs.400 zone at last week's closing tick. The stock has moved up a whooping 400% during the period under contention as mentioned above. Same goes for MMTC which has appreciated from Rs.9100 levels at lows which has ended up at Rs.31200 at last week's closing level. Both the stocks are sustaining high valuations based on their price to earning multiples.
The Buck Stops at Demand-Supply Equation
The intent of this post on the blog is not to discourage readers planning to enter low floating stocks or encouraging them to exit such counters if they already hold them. Also, it is not necessary that all low floating stocks ought to be expensive. At times, there could be counters where the float is low but the volumes are healthy.
The intent is simply to Alert the readers that in counters where there could be near-term opportunity of price appreciation in such disinvestment candidates with majority stake in government's hold; the valuations in such stocks may find it difficult to sustain at higher levels as the floating stock and volume increases for trading in the open market during the longer time span. The simple logic that could apply over here is that with low floating stock the demand for the stock far out-strips the supply in such counters.
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