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• Deven Choksey, managing director of KR Choksey Shares and Securities gives his perspective on the government plan for divestment and also picks out his favorite sectors and stocks within.
• Q: Our analysis shows that profit could erode between 10% and 50% for some companies if the government does go ahead with cross-purchase or buyback of shares. Have you downgraded the EPS of any companies?
• A: We have done an impact analysis on a few companies like Coal India , ONGC  and NTPC . In case of Coal India, we have taken into account loss due to the other income and incremental EPS due to the buyback and check out what net positive impact is going to come at the bottomline.What we have found is that, loss due to the other income on per share basis for Coal India is about Rs 1.85 and the push in EPS due to the buyback of shares is about Rs 2.53. If you look at net effect of hike in the EPS due to this particular impact, it is about less than 70 paisa. If you translate that into market price, it is less than Rs 10 per share for Coal India.Likewise, for ONGC, it translates to less than Rs 20 per share, and for NTPC , it is just Rs 2.50 per share.
• At this point, we haven’t yet downgraded any of these companies. However, we believe that the rationale would prevail and they would not go into a buyback and reduce the number of shareholders because this would give a wrong signal to people outside who have invested in this country. I hope they would think a bit more before they go ahead with any sort of buyback or crossholding activity from the PSU companies.
• Q: You don’t downgrade any stock because you see the impact on share price to be minimal. Do you suspect that this is seen as bad corporate governance by a lot of institutional investors and these stocks could trade at a further discount to their peers? Would that be any reason for people to sell off?
• A: You said it all. The institutional investors, retail investors never gain confidence in the companies when they do this kind of activities.I do understand the requirement of the government to manage the fiscal deficit and they are required to divest their holdings into respective companies. Since market is not giving them the opportunity, they want to take this route. But there could be some other routes as well. Either the government can take the cash out of these companies and then distribute it by way of dividend and manage the fiscal deficit. The other way could be - create a special purpose vehicle (SPV) in which corpus of money can be created by way of Hard-To-Tax (HTT). And through that money, PSUs buy back or buy those shares into SPV and at an appropriate time shares can disinvested from that SPV.These are some of the alternatives that (govt) it needs to consider if it really wants to get to the root problem for managing the fiscal deficit.
• Q: There are issues with BHEL. Have you downgraded BHEL and what stock price you hope to see on that?
• A On the basis of this buyback or crossholding investment we have not downgraded any of the stock.BHEL has already corrected because of the other situations in the market, its valuations have got adjusted significantly. It is available at the cheapest price since its listing, so it is an opportunity to invest in this stock. We believe that at least they have two and half years of visibility as far as business is concerned.Going forward as the situation will start improving; BHEL , L&T would start getting higher amount of order flows and their valuations will rise. Stay invested in this company and buy the stock when it dips.
• Q: There have been several stalwarts who have spoken about softer sales. L&T said that, Infosys said it a couple of times. And today we had Rajeev Bajaj saying that, to achieve the same amount of sales, a lot more effort has to go in because of the softness of the markets. Do you expect further downgrade in sales and profits for FY12?
• A: In case of Infosys particularly and even Bajaj Auto, one of the key important factors is the behavior of the currency. We all were happy when the currency had depreciated as it (Infosys) would get the advantage in form of their exports or forex earnings. But that’s not the case because when a buyer is negotiating with you on the price, he definitely takes that factor out and asks for discounts.To a greater extent the companies are not getting that benefit. At the same time they have hedged their receivables in order to safeguard their performance on the bottomline. I don’t think that there is an advantage. However, issues like depreciating currency, brakes in the economy from growth perspective, need to be resolved very quickly. Currency depreciation needs to be properly intervened and one should see a better roll back for that activity.If that happens, then there won’t be a fear in the situation. But in such situation when the actions are delayed, there may be a run down side risk on the stock.
• Q: What other heavyweights look good at this point, apart from BHEL, for further upside say maybe in six months to a year basis?
• A: One of the stocks which are there in the frontline is Reliance, of course because I think they are probably not getting as much affected due to all this. However, the controversies around is playing heavy on the minds of the investors currently. Having said that, it is important to note that this stock will have cash in the balance sheet of around Rs 250 crore at the end of this financial year. That makes it a relatively safer company and I would call it a topline stock.That apart, some of the midcap companies are looking quite interesting from investment point of view. You may find companies like IndusInd Bank and Glenmark Pharmaceuticals, for which business goes well at this point of time. Some of the infrastructure companies which are in asset ownership space like Mundra Port Trust belong to the category of companies that are not getting affected with the kind of a situation in which we are in as much as I think the others are, particularly on the mark-to-market provisioning side of forex. So these are the companies which we like from investment point of view.
• Q: This FDI in cable - are you buying Hathway or DEN or any of those stocks?
• A: Not yet. I think they need to spell out their inorganic growth plans because I think the larger benefit would go to the conversion of the customers which are there with the local cable operators. If you end up picking up some of the local cable operators into your company, which is an inorganic way of growing, then probably, some of these companies may stand a good chance from an investment point of view.

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