PSU presence in Rs 1-trillion club shrinks in 2020; index declines 18%

PSU participation in the Rs 1-trillion club shrank in 2020. The number of public sector companies with a market capitalisation (m-cap) of Rs 1 trillion or more has come down by four in the current year. The companies that exited the trillion club are IOCL, NTPC, BPCL, and Coal India. 

On a year-to-date (YTD) basis, the BSE PSU index declined 18 per cent. In comparison, the Sensex gained 13.7 per cent, despite the pandemic causing turbulence. Even the two PSU firms in the trillion club saw m-cap erosion. State Bank of India (SBI) saw a 20 per cent m-cap erosion, while ONGC’s m-cap declined 27 per cent.  “SBI was affected by the pandemic. The entire banking sector, except the private lending leaders, are affected,” said G Chokkalingam, founder, Equinomics. 

Reliance Industries, TCS, and Infosys saw a big increase in their m-cap in absolute terms. Reliance Industries added Rs 3.5 trillion to its m-cap, Tata Consultancy Services added Rs 2.8 trillion, and Infosys added Rs 2.1 trillion. The worst erosion in absolute terms was for SBI. It’s market value eroded by Rs 59,750 crore to Rs 2.3 trillion. ONGC saw its market cap value go down by Rs 44,786 crore, or 27 per cent, to Rs 1.1 trillion, and ITC witnessed its market value decline by Rs 35,000 crore to Rs 2.5 trillion. Analysts said lack of consistent growth, operation in sectors which are out of favour with the markets, and sector-specific issues are some of the reasons for the shrinking PSU presence in the Rs 1 trillion club. “Pharma and IT firms were rewarded by markets this year. None of these firms operate in that sector. That’s one reason they weren’t rewarded, despite some of them being sector leaders,” said Chokkalingam. “The power sector has issues of outstanding bills. Discoms couldn’t clear their dues. ONGC’s subsidiaries had taken oil assets. Most of them were purchased when oil was close to triple digits. Now with crashing oil prices, it's hitting the firm,” he added.    

Lack of interest from foreign funds that invest as per ESG mandate have also dampened investor appetite for these stocks. The inability to leverage their balance sheets and diversify into growth areas is another reason for investor enthusiasm. Some factors are exogenous, such as falling oil prices.

“The government is not letting these firms leverage their balance sheets. They are telling them to give dividend. Some of these firms should be growing their solar assets and renewable portfolio in a big way.  They are investing in the green theme. However, they are not investing to the extent required,” said Abhimanyu Sofat, head of research, IIFL.

Analysts said strategic disinvestment and buybacks to improve their balance sheets could see re-rating in PSU majors. “If there is a change in management, there could be a re-rating in multiples,” said Sofat.