Over the past five years, when the benchmark Sensex clocked a return of 45%, the BSE PSU index and the Nifty PSU Bank index yielded negative returns of 17% and 36%, respectively.
By Shashank Nayar & Yoosef KP
Listed public sector undertakings (PSUs) have seen a significant erosion in value over the past decade. The market cap of BSE PSU index, which was 31% of the broader BSE500 index in 2009, is now down to just 12%. While some market experts believe that PSU stocks can create value going forward, as they are the biggest beneficiaries of the corporate tax cuts, others believe these are value traps.
The BSE PSU index — that comprises 61 PSU stocks ranging from banking to power sector stocks — has been under-performing the broader market for the last two and a half years. As a result, not even a single PSU features in the list of top 10 companies by value.
Over the past five years, when the benchmark Sensex clocked a return of 45%, the BSE PSU index and the Nifty PSU Bank index yielded negative returns of 17% and 36%, respectively. In fact, two leading PSUs — Coal India and ONGC — have lost nearly Rs 3 lakh crore in market capitalisation during the same period. Furthermore, NTPC, which was among India’s five most valuable components of the Sensex, when it hit 10,000 and 20,000 mark for the first time, is now languishing at the 25th position as per market valuation.
A CEO of a leading fund house said companies like NTPC, Coal India or even ONGC are not going away from the benchmark index, they are going to stay.
The CEO added, “They might be suffering from government policy and lack of minority shareholders focus but will continue to generate cash. Maybe they will turn around if the government privatises these companies and runs them professionally.”
In many cases, the businesses that these public sector companies are present in are good and in most cases are even monopolies. However, these companies have not delivered returns to shareholders for a variety of reasons. Coal India, which is the largest coal producer in India, enjoying a monopoly situation, historically has not been able to produce the desired growth even as it stands cash-rich. Coal India’s profits have grown at a CAGR of 2.93% in FY15-19, while its revenue rose 6.2%.
“Over the past two years the investment sentiment has been somewhat negative with investors looking to buy only top quality stocks where majority PSUs are not able to compete as they have been unable to record substantial growth,” said Siddhartha Khemka, vice-president and head of retail research, Motilal Oswal.
Analysts also believe the stress in the banking system, especially in PSU banks on account of poor asset quality and loss of capital due to increased level of scams over the past few years has led the BSE PSU index to record such negative returns. “The fall in the BSE PSU index could also be attributed to deteriorating conditions in PSU banks on account of poor underwriting skills and bad asset quality. Also there were added pressures on some due to increase in frauds and defaults,” added Khemka.
However, not all seems so bleak as analysts believe that select PSUs like Container Corporation of India (CCI) and Bharat Petroleum Corporation (BPCL), which the government plans to divest, would perform well on the bourses and as they also stand to benefit the most from the recent corporate tax cuts announced. “Given the current scenario, a lot of PSUs are trading at attractive valuations and will also be market performers come November on the back of tax cut benefits,” said Sanjiv Bhasin, EVP- markets and corporate affairs, IIFL.
For instance, BEML, which had an effective tax rate of 51.6% as of FY19, saw its shares surging nearly 11% since September 20, when the government announced the corporate tax cuts. The stock has recorded a 54% return in the past one year. Also, prior to the tax cuts, ONGC was in the highest corporate tax bracket in the country.