Introduction
As the Sensex breached the 70,000 milestone, the often overlooked PSU stocks have emerged front-runners – cumulatively adding over ₹26 lakh crore in market value and even surpassing private sector giants.
Analysis of this news for a layman
The BSE Sensex is India’s leading stock market index made up of the 30 largest and most actively traded companies on the Bombay Stock Exchange. As the Sensex has rallied from 60,000 to the historic 70,000 level over the past 16 months, the listed state-run companies or PSUs have delivered standout returns relative to their usual underperformance.
In total, the market capitalization or total value of all outstanding shares of profitable PSU stocks has more than doubled from nearly ₹20 lakh crore to ₹46.4 lakh crore over this period. Surprisingly PSUs like SBI, Coal India, ONGC and HPCL have created more wealth than even private titans like Reliance, Tatas and Adanis amid expectations of reforms and efficiency improvements. Stocks across banking, oil, power and mining sectors have surged multi-fold on value buying. The outperformance signals restored investor confidence in government assets.
Original Analysis
The striking outperformance of PSU stocks reflects a pivotal shift in their positioning in India’s economic landscape. Having languished with corporate governance issues for years, systemic improvements are emerging. The privatization of Air India and listing of LIC symbolized intent towards better capital utilization. Higher dividends, focus on profitable growth over market share and management accountability have become visible.
Strong public spending and strategic divestments have also improved fiscal health. The reform momentum has the potential to unlock substantial productivity from state-run firms through greater transparency and efficiency. For investors, PSUs have emerged as value picks leveraged to the country’s infrastructure and manufacturing capex cycle while available at reasonable valuations. The risk-reward appears compelling today, presuming reform sustainability.
While optimistic signs are emerging, execution remains key as many PSUs continue grappling with structural challenges. Investor engagement and reform momentum need close monitoring.
Impact on Retail Investors
For retail investors, the resurgence of PSU stocks expands the universe of value investing opportunities while offering diversification from richly valued private sector names. Execution-focused PSUs across banking, materials and energy look well positioned to benefit from India’s capex cycle and self-reliance vision.
However, retail investors should assess each PSU independently rather than paint all with the same brush. Balance sheet stress, asset quality concerns, legal disputes and social sector burdens continue to challenge certain PSUs and hence diligence is vital. Reforms also face political economy risks. Investors should size exposures prudently and average over time rather than pursue momentum trades. Focus on dividend yield and value parameters rather than optimism alone.
Impact on Industries
The earnings surge of public sector companies, especially lenders and commodity producers, signals their balance sheet resurgence with positive ripple effects across industries. Well-capitalized PSU banks can expand lending to distressed sectors including real estate, power and infrastructure – resolving NPL issues. Profitable mining and materials PSUs also bode well for user industries reliant on key inputs like coal, steel, oil and gas.
Additionally, the government’s infrastructure spending and PLI schemes signal demand visibility for capital goods, cement, utilities and allied sectors. The uptrend in PSU stocks reflects expected multiplier effects on employment, incomes and manufacturing as capex reverberates across interlinked sectors.
However, competitive intensity may rise for certain private players that now face a re-energized PSU ecosystem across banking, insurance, oil retailing etc.
Long Term Benefits & Negatives
Strategic stake sales with operational freedom portend better governance and efficiency gains for PSUs over the long run. Higher shareholder returns via dividends/buybacks are also expected with clarity on capital allocation policies. Unlocking trapped productivity and resources would support GDP growth.
Reforms may also gradually reduce the sclerotic public sector’s burden on the exchequer through self-sustaining operations. This aids fiscal consolidation. Operational synergies between government and private enterprise could also emerge in sectors like defense, space and atomic energy earlier dominated by state players.
However, political economy risks to reform continuity remain a concern given the widening income inequality outlook. Execution complexity also remains high. Legal disputes around asset divestment and labor tensions require delicate balancing. State support cannot be suddenly withdrawn without risking market failures.
Short Term Benefits & Negatives
In the near term, PSU stocks offer a proxy for capex revival across materials, lending, energy and infrastructure – aided by government policy thrust. Reasonable valuations also offer investors a buffer against market volatility. Risk appetite may sustain with retail investment flows as India consolidates as an FII-underowned emerging giant following China’s disengagement.
However, PSU stocks remain vulnerable to political interference, social sector burdens and energy/food inflation costs given monopolies in key sectors. Past experience shows reform gains require perseverance to sustain. Investors should temper return expectations and focus on financial metrics rather than chase momentum. Sudden P&L setbacks on cross-subsidies remain a possibility as well.
Companies will gain from this
SBI – India’s largest lender SBI is poised for sustained earnings momentum led by balance sheet resurgence, market share gains, improved asset quality and strengthening NIMs. Higher credit demand augurs well. Power Grid Corp – Stable regulated returns make the power transmission major an attractive yield/value play. Renewable energy infrastructure investments enhance growth visibility. NTPC – Favorable domestic coal availability bodes well for the power major’s earnings sustainability and cost structure. Renewable capacity expansion also mirrors positive outlook. BHEL – One of the largest beneficiaries of increased infrastructure spending by Central PSUs. Fast-tracking project execution would bolster growth and order inflows. However, investors should assess financial parameters rather than extrapolate broad PSU optimism. Stock-specific diligence and risk management remain vital.
Companies which will lose from this
While PSU resurgence broadly enhances productivity and capex, some private players face incremental competitive intensity:
ICICI Bank & HDFC Bank – Rising market share of public banks may relatively erode some retail loan advances growth and liability franchise value of private lenders. Bharti Airtel & Reliance Jio – Growth outlook remains firm but tariff hikes could face more regulatory scrutiny amid PSU telecoms consolidation attempts. Larsen & Toubro – Public capex may intensify battles for engineering/construction contracts through aggressive bidding from PSU peers. Execution capabilities would differentiate. Most private players retain superior profitability, efficiency and balance sheet strength. Competitive risks from PSU disruption appear manageable at this stage.
Additional Insights
PSU reforms require a delicate balancing act between privatization and social equity. Investor engagements can pave the middle path.
Conclusion
PSU stocks have emerged as surprise wealth creators for investors as reforms momentum unlocks productivity. However, financial and operational assessments rather than sector-wide optimism should guide investments. Execution complexity persists amid social equity constraints.
Author(s): Rajesh Mascarenhas, Title: “PSUs Take the Honours in 10k Run,” Date: December 15