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LIC isn’t alone, shares of half the PSUs that went public since 2010 trading below IPO price

Only seven of 22 PSU stocks are currently trading at double their issue price. LIC, the much-awaited IPO, managed to garner Rs 20,560 crore.

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New Delhi: The central government, irrespective of the party in power, is often criticised that it goes for an IPO of a public sector undertaking (PSU) not because it wants to unlock the value or potential of that business but because it needs the revenue to meet its disinvestment target.

The result: Many of these stocks fall below their issue price after they are listed, hurting investors who trust equities to earn higher returns than other investments.

Data analysed by ThePrint shows that Life Insurance Corp (LIC) of India, which went public last month, isn’t the first such PSU to experience this, although it certainly is the most high-profile.

Shares of half the 22 PSUs that have gone public since 2010, data from Prime Database shows, are trading below their issue price.

The central government had raised Rs 77,000 crore in all through the IPOs of these 22 companies, with the LIC IPO contributing a quarter of the amount.

Credit: ThePrint Team
Credit: ThePrint Team

But why do stocks of public sector companies get beaten down by investors and traders after their listing? Most market experts ThePrint spoke to said that the government has listed most of these companies as a process of raising money through disinvestment rather than from a view of creating value in the company, which is why most IPOs lost value after their listing.

Experts also fear such a fate for the state-owned LIC, whose offer-for-sale of 3.5 per cent of its stake in the company, or 221.4 million shares, earlier this month made it India’s largest IPO.

An IPO, or an Initial Public Offering, is a process by which an unlisted company sells its securities to the public for the first time in order to raise funds. Once it gets listed on the stock market, it becomes a public-traded company that can sell its shares in the open market.

Only seven PSU stocks — those of MSTC Ltd, Indian Railways Catering and Tourism Corporation (IRCTC), Rail Vikas Nigam, Mazagon Dock Shipbuilders, RITES Ltd, Mishra Dhatu Nigam Ltd, and Bharat Dynamics — of 22 have good returns to investors where the stocks are currently trading at more than double their issue price.

IRCON International Ltd and General Insurance Corporation of India are both at the bottom of the list of PSUs whose IPOs are trading substantially lower than their issue price.

In September 2018, the government brought out the IPO of IRCON International to raise Rs 500 crore from the stock market and managed to successfully complete the process with an issue price of Rs 475 a share.

The company then went for a stock split in April 2020, splitting one equity share of face value Rs 10 each into five equity shares of face value Rs 2 each (5-for-1).

Adjusting for the stock split, the issue price for IRCON shares comes out to Rs 95 per share. The shares closed at Rs 39.34 per share Friday — around 60 per cent down from its issue price.

Similarly, for General Insurance Corporation, the government raised Rs 11,000 crore by selling its stake in October 2017. Today, the stock is trading nearly 74 per cent lower than its issue price.

For IRCON International, while the broader market has grown almost 50 per cent from the time the stock was listed, the firm’s stock has fallen over 90 per cent. The PSU index has grown around 11 per cent since September 2018.

Similarly, for General Insurance of India, while Nifty increased around 60 per cent, the insurer’s stock fell 74 per cent from the issue price. However, since the listing of the stock in October 2017, the PSU index has fallen around 8 per cent.

Other companies that have a faced similar fate include New India Assurance, Cochin Shipyard, Punjab & Sind Bank, MOIL Ltd and Coal India, which was the second-largest IPO for a state-run firm after LIC. These stocks are down at least 5-7 per cent from their issue price.

Also Read: Why Modi govt’s modest Rs 65,000 crore disinvestment target for FY23 seems to be a tall order

The problem with LIC

LIC was the much-awaited IPO for the market this year despite headwinds like the RBI rate hike aimed at sucking liquidity out of the system, Russian invasion of Ukraine, and consequent elevation in global commodity prices. The government managed to garner Rs 20,560 crore from the IPO.

For LIC, one of the major criticisms was that it was overvalued at Rs 949 a share, and it was predicted that, after the listing, the stock would witness a beating.

Amit Kumar, founder and chief investment officer, Fintrekk capital, said: “LIC deserves to be valued cheaper than professionally managed, well-regulated & transparent insurers; just like public sector enterprises (including banks).”

Credit: ThePrint team
Credit: ThePrint Team

He added that, before the LIC IPO, he was advising clients not to get swayed by the price action of IRCTC, where many investors claim they made huge money when the shares were allotted. IRCTC, which was listed in 2019, is currently trading at double the price at which it was issued in the IPO at Rs 320 a share.

“Investors conveniently ignore the underperformance of Railtel, IRFC, and others since IPO listing. Such IPOs in the PSU space, at least historically (Coal India, UTI, NTPC, ONGC etc), have all made only ‘tough money’ for the investors,” Kumar said.

The Department of Investment and Public Asset Management (DIPAM) said that, with LIC, the government has changed the idea with which a PSU is listed.

“Before the IPO of LIC was brought to the market, there were several reforms that were undertaken in the company. For example, the company has now updated to the latest software that helps in determining where a policyholder’s money will be invested, the moment a policy is sold,” a senior government official told ThePrint.

LIC said Monday that its consolidated net profits for the quarter ended March were down 17.4 per cent at Rs 2,409 crore, compared to Rs 2,917 crore in the same quarter last year. In a regulatory filing, the insurer announced a dividend of Rs 1.50 per share.

An investment banker, who didn’t want to be named, said: “The government may have to be careful with other PSUs that have to be listed this year like the Export Credit Guarantee Corporation of India, WAPCOS and National Seeds Corporation Ltd. Investors are wary of PSU listings after the experience with the LIC.”

(Edited by Uttara Ramaswamy)

Also Read: Why Modi govt’s BPCL privatisation process ran out of gas and is back to the drawing board

(This article was updated to reflect the correct figures for IRCON International. The error is regretted)

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