PSU stocks like MMTC, Hindcopper, STC India, NMDC, Dredging Corporation  etc.,  have gone up anywhere between 30-60% last week. MMTC has rallied from Rs.540 to Rs.900 up 66%, followed by STC India up 53% and Hindustan Copper up 56%.

So, what's the buzz? The government has been thinking of raising funds through the buyback route and under the buyback mode, the government can raise money by selling its equity in the company. After the government's due approval, institutions, banks and companies interested in buying government stake in PSUs will be able to send their proposals and buy these shares.

Recently, SEBI has allowed promoters to offload their stakes through auctions and this move will facilitate the government's efforts to sell these stocks at better prices. With the new window, the government will be in a position to negotiate better prices for the stake sale and hence the huge spurt in stock prices of these companies.

Does buyback move warrant such huge jump in these stocks? No, since most of the companies on the fundamental part do not justify such high price -  for e.g., MMTC is just a trading company and its current EPS stands at Rs.2 and at the current price of Rs.900 the P/E ratio works out to 450, which is abnormal. And similar is the case with other mines and mineral stocks.

This huge rise is entirely driven by the buy-back news and also due to low liquidity of the floating stock (since Government of India holds about 90% each in all of the stocks mentioned above).  We have seen many such hi-fliers before and know what happened to them later. Hence, investors are better off,  if they would stay away from such stocks, even if they fall 30-40% from current prices.

Buyer beware !

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