Investing in PSU stocks? Three key reasons why you may be left with lower returns

By: | Published: March 1, 2019 4:47 PM

While the last one year has been highly volatile for the overall stock market in general, several PSU stocks have plummeted, and seen their market capitalizations collapse over the time frame, according to a report We take a closer look.

Potential M&As between PSUs may have deterred investors from PSU stocks leading to large gaps between their fair values and stock prices, notes a Kotak Institutional Equities report.

While the last one year has been highly volatile for the overall stock market in general, several PSU stocks have plummeted, and seen their market capitalizations collapse over the time frame, according to a report. Many stocks are trading at large discounts to their fair values, Kotak Institutional Equities said in a report. “We attribute the same to the market’s concerns about (1) unsustainable high levels of debt, (2) future of businesses in ‘low’ ESG industries, facing potential disruption and (3) weak corporate governance practices,” said the report.

With specific relation to PSU stocks, the research house noted that uncertain policies in certain sectors (such as automobile fuel pricing) and potential M&As between PSUs may have deterred investors from PSU stocks leading to large gaps between their fair values and stock prices.

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“Also, we wonder if the government’s preferred mode of divestment through ETFs may have aggravated the problem,” it added further. The government may want to examine data on (1) the type of buyers of PSU ETFs and (2) the duration of their holdings of ETF units and review the 5% discount to the ETF unit value at the time of sale of fresh ETF units in case the buyers are largely institutional investors with short investment horizons, suggested the report.

Highlighting the the importance of corporate governance in the industry, the report said that many Indian companies still fail to realise its vitality, as many of them (1) have high levels of debt and (2) operate in cyclical commodity businesses with highly cyclical cash flows. “As it is, many Indian companies and groups already face tough choices to manage their ‘excess’ leverage relative to cash flows (debt resolution under IBC, asset sales, pledged shares). They would require the support of equity markets to survive business downturns or expand,” noted the Kotak report, adding thaT The least these firms could do is to improve corporate governance practices to avoid becoming ‘pariahs’ for equity markets.

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