Divestment push may boost PSU m-cap on bourses from all-time low currently

Nifty PSE index closes at highest level since January 2018

The share of public sector undertakings (PSUs) in the total market capitalisation of listed companies--at an all-time low of 10 per cent currently --- may get a leg-up from the government's disinvestment push.

Last week, the government announced the successful sale of national carrier Air India to Tata Sons, India’s first privatisation of a PSU since 2002–03. The transaction is expected to be completed by December.

The development buoyed shares of several PSUs with the Nifty PSE index rising 1.8 per cent to close at its highest level since January 2018. Shares of NMDC and Coal India gained the most at 5.8 per cent and 4.4 per cent respectively.

In its Budget earlier this year, the government stated that two public sector banks and one general insurance firm would be privatised in FY22. It is also planning a public share sale for LIC and intends to limit its presence only in strategic sectors.

“The Air India sale clearly signals the government's intent to move forward with its ambitious privatization/divestment agenda,” said a note by Motilal Oswal Financial Services.

With BPCL, Pawan Hans, Central Electronic, Salem Steel Plant, SCI, BEML and Nilanchal Ispat Nigam in various stages of strategic divestment, there is likely to be further action on this front in this fiscal, the brokerage added. The government is also looking to come up with expression of interest for IDBI Bank, RINL, Concor, HLL Lifecare, PDIL, and IMPCL for strategic disinvestment.

The NDA-1 government had privatized nine PSU firms -- Modern Food Industries, Balco, Hindustan Teleprinters, CMC, Indo Burma Petroleum Company, VSNL, Pradeep Phospates, Hindustan Zinc and IPCL --- between 1999 and 2003. The government had also sold stakes in 19 properties of ITDC and three properties of Hotel Corporation of India.

Listed PSUs have seen a rally on the bourses in the past month and the disinvestment drive augurs well for the fortunes of these companies.

“PSUs have rallied on expectations of divestment and are riding the commodity upcycle. This momentum can continue for some more time especially after the Air India decision,” said Deepak Jasani, head – retail research, HDFC Securities. “It remains to be seen how long the commodity upcycle will last as it has a direct bearing on inflation, something that central banks the world over are increasingly uncomfortable with.”

Several PSUs are involved in businesses linked to commodities such as oil & gas and metals, whose prices have shot up in the past few months. Global crude oil prices are currently quoting at $80 per barrel and are expected to surge further. Natural gas prices have soared to record highs.

PSU stocks have historically been considered as value picks and are known for giving out attractive dividends mainly to meet the government’s revenue targets. The Nifty PSU Bank index, for instance, is currently trading at a one-year forward price to earnings multiples of 11.1x, which is lower than other sectors except metals, according to a recent note by IDBI Capital.

“There has been significant momentum in the markets over the last few months which is also led by decent sectoral churn. What we are witnessing now is that laggard sectors of the last few years are now participating, including PSUs and Real Estate sector,” said Sunil Singhania, founder, Abakkus Asset Manager, in a note to investors.

The paucity of reforms, lack of professional and independent management, poor capital allocation and an inefficient remuneration structures are some of the perceived ills plaguing the public sector.

“Reforms in PSUs are expected to continue. But investors need to monitor the political and economic landscape to gauge how these stocks will perform in future. Those with a high risk appetite can allocate 20-25 per cent of their equity portfolio to PSU stocks and those with a limited risk appetite can allocate 5-8 per cent,” said Jasani.

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