Imagine a stock worth Rs 28,000 crore but free float as low as 1%, which means shares worth only Rs 280 crore are available for trading in the open market. Low public float means less supply and when even a few investors start buying, the stock price can skyrocket quickly due to supply-demand mismatch and make valuations look expensive.

This isn’t a hypothetical example to understand the link between stock price reaction and concentrated ownership but a reality in the world of PSU stocks on Dalal Street.

Among all the listed stocks, Bengaluru-based PSU mining company KIOCL holds the record of lowest free float of just 0.97% as the Indian government owns 99.03% in the company. The miniscule free float means that even a relatively smaller amount of buying or selling can have a bigger impact on the stock price as the number of bulls increase.

While institutional investors always factor in the free float while picking a stock, retail investors are yet to learn this trick of the trade. In case of KIOCL, almost three-fourth of the free float is owned by small retail investors (up to Rs 2 lakh category).

The stock, which would look like a microcap if you consider only the free float part, is up 130% in the last one year.

Similarly, Punjab & Sind Bank whose shares have jumped 154% in one year, is 98.25% owned by the government. This means that out of the Rs 48,000 crore market capitalisation it is commanding on the Street, the public float is just about Rs 960 crore.

There are at least 10 such PSUs where the government, in its capacity as the promoter, owns at least 90%. Nine out of them are multibaggers in the last one year.

Sebi rules mandate 25% minimum public shareholding norms but many companies get exemption. LIC, which recently got that exemption till 2032, is 96.5% owned by the government. The stock has rallied 81% in one year for multiple reasons, including the exemption which reduces the overhang of an offer for sale (OFS).

Other multibaggers in the list are Indian Overseas Bank, UCO Bank, HMT, Central Bank of India, ITI, State Trading Corporation and FACT.

It is because of the low float that IOB commands a market cap of Rs 1.4 lakh crore, making it bigger in size than Bank of Baroda and IndusInd Bank.

Is the PSU stock rally just a low float game?

Had the PSU stock rally been just about low free float, these stocks would have been investor favourites a long time ago and not been left languishing in a corner over the years. Besides the float factor, the boom is also about positive investor sentiment and improving fundamentals.

The BSE PSU index has almost doubled in the last one year and has grown at a CAGR of 28% (including dividends reinvestments) over a five-year period.

“While initially cautious about significantly increasing our exposure to PSUs, recent data indicating improvements in operating performance has led us to augment our holdings in PSU companies,” DSP Mutual Fund said, while arguing that underlying data suggests a turnaround in operating performance of PSUs.

“Typically, substantial re-rating occurs when Return on Equity (ROE) exceeds the cost of capital. Hence, it’s not surprising that stock performance for PSUs surpassed the underlying profit growth for these companies,” the AMC said.

Analysts at Kotak Institutional Equities have, however, warned that the market is overly focused on near-term ordering and profitability, while ignoring the large downside risks to medium-term profitability, business model challenges and disruption risks.

In case of capital goods PSU, Kotak’s Sanjeev Prasad said the market is underestimating the risks in assuming large order inflows for an extended period of time and perpetually elevated margin/return profile. “In our view, the government’s three-in-one role of buyer, owner and policy-maker/regulator creates uncertainty regarding the companies’ future earnings and returns,” he said.

Just the way a low float can help the stock price to rise up quickly, the downside too can be as quick and sharp.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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