Play safe with PSU stocks ahead of Budget despite divestment trigger

Among the stocks that comprise the Nifty CPSE index, seven have recorded negative returns during the fiscal

Shares of most Central Public Sector Enterprises (CPSEs) have remained under pressure thus far in the financial year 2019-2020 (FY20) with the Nifty CPSE index slipping 20 per cent. In comparison, the benchmark Nifty 50 index has gained 5 per cent during the period. The index’s underperformance, analysts say, has been on account of likely delays in stake sale by the government in select public sector undertakings (PSUs).

The NIFTY CPSE Index has been constructed to facilitate government’s initiative to disinvest some of its stake in selected CPSEs. Except Bharat Electronics and SJVN Limited that have gained 5 per cent and 9 per cent respectively in FY20, the remaining seven stocks that comprise the index have recorded negative returns during the fiscal.

While NBCC has tanked 45 per cent, Indian Oil Corporation (IOCL), Oil and Natural Gas Corporation (ONGC) and Oil India have lost in the range of 25 per cent to 27 per cent. NLC India and Coal India, too, have plunged 20 per cent each.

On January 22, the index slipped nearly 4 per cent and closed at 52-week low of 1,788 points. Among stocks, Oil India and IOCL hit their respective 52-week low. Effective from Friday, January 24, IOCL and Power Finance Corporation (PFC) from the index have made way for Cochin Shipyard, NHPC, NMDC and Power Grid Corporation.

“For ONGC, as with other Indian state-owned-enterprises, government stake sale remains an overhang and we do not expect any near-term resolution to this soon. However, with a stronger crude outlook, we would recommend some upstream exposure within the Indian energy sector. ONGC’s volume growth should pick up in gas, while range bound oil prices should allow for reasonable dividend payouts,” analysts at JP Morgan said in a recent report.

Limited spending room

Poor tax revenue collections have left the government with limited spending room to address issues plaguing the Indian economy. While the government, according to most estimates, is likely to miss its ambitious divestment target of Rs 1.05 trillion for FY20, the upcoming Budget may yet again rely on divestment proceeds in the next fiscal to bridge its revenue shortfall.

“According to reports, the government got Rs 18,094.59 crore via disinvestment proceeds during 2019-20 so far, as against the Budget Estimate (BE) of Rs 1.05 trillion. With the delay in strategic sales, the government may announce to collect another Rs 1 trillion in the upcoming budget from the disinvestment of state-owned firms,” said Dr M Govinda Rao, chief economic advisor at Brickwork Ratings.

As things stand, Sunil Tirumalai, head of research at Emkay Global expects the divestment target at Rs 1.05 trillion, based largely on privatisation of BPCL and Concor.

In this backdrop, analysts advise investors stick to the mid-sized PSUs as the chances of strategic sales in this segment remain high.

“Bigger the PSU, more are the chances that the government may ask it to take over an ailing smaller PSU. This can put the financials of the larger peer under stress. A safe investment strategy would be to stick to the smaller units even after the Budget,” said G Chokkalingam, founder and managing director, Equinomics Research.