Jewels in govt crown give returns of up to 500% on OFS bets

Mumbai: Conventional wisdom might argue against investing in offers for sale (OFS) in state companies given the unknown impact of oversupply. But a contrarian play, an ET analysis shows, would have largely yielded outsized returns.

OFS in state firms returned between 25 and 500% in 11 companies of the 17 in which New Delhi chose this route to dilute ownership. Only one offer is presently trading below OFS price.

The ₹1,100 crore, two-day OFS in Housing and Urban Development Corp (Hudco), which ended on Thursday, saw oversubscription. The non-retail segment of the offering demonstrated strong investor interest, with a subscription rate of 2.1 times on Wednesday.

Encouraged by this enthusiastic response, the government decided to exercise the greenshoe option, thereby divesting an additional 3.5% stake in the company.

In March 2021, the government sold a 15% share in Rail Vikas Nigam via the OFS mechanism at ₹27.50 a share. The stock currently trades at ₹167, a six-fold premium to the OFS price compared with the 35% returns for the Nifty in this period. Again, in July this year, the government sold shares at ₹121.60 apiece. The stock has given 37% returns since then, compared with a flat yield for the Nifty.

In 2020, the government sold a 15% stake sale in Hindustan Aeronautics as part of its disinvestment program and the ₹5,000 crore OFS at ₹1,001 a share. Currently, the stock is trading at a 290% premium. The company split its face value from ₹10 to ₹5 last month. In March, the government again divested Hindustan Aeronautics shares, and the stock has given a return of 58%. Similarly, Ircon International, Bharat Dynamics and IRCTC have given returns of 243%, 205% and 154%, respectively.

“Markets have slowly started to recognise the potential and execution of PSU companies, which were once frowned upon due to their operational inefficiencies, weak corporate governance and red tapism,” said Manish Chowdhury, head of research at StoxBox. “Being in economic-centric sectors, selective PSU companies still offer valuation comfort, possess strong revenue visibility, have good execution track records in the past few years and offer an additional comfort of good dividends.”

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