PSU m-cap up 77% in 7 months as investors move towards value stocks

But share in total m-cap languishes below 10%, lower than long-term average of 13%

State-owned firms have seen their combined market capitalisation rise 77 per cent over the last seven months amid a shift in investor preference from growth stocks to value stocks. However, their share in market capitalisation of all listed companies continues to languish below 10 per cent.

On October 14, 2020, the share had slipped to a record low of just 7.5 per cent. Since then, state-owned firms have added over Rs 9.3 trillion in market capitalisation to take it to Rs 21.4 trillion, a jump of 77 per cent. The share of PSU market cap has improved to 9.24 per cent, but remains below long-term average of 13.4 per cent.

The overall market cap during the same period has increased 44 per cent to Rs 231 trillion.

The bulk of addition in PSU market cap is thanks to State Bank of India. The lender has seen its market cap increase by Rs 2.05 trillion to Rs 3.83 trillion since October. ONGC and Power Grid have added Rs 71,142 crore and Rs 46,718 crore, respectively.

Since 2015, PSUs’ share in India’s total market cap has been on a steady decline. The overhang from disinvestments and continued extraction of dividends to fund fiscal requirements despite slump in profitability have led to negative sentiment toward the stock.

“Many large PSUs are trading at only a fifth of their highs. Their disclosure norms are bad. In some cases, high cost of operations have been a drag,” said AK Prabhakar, head of research, IDBI Capital.

Analysts said many PSUs have a market advantage and should utilise the money to expand effectively, instead of paying the government or buying companies at the government’s behest.

Lack of consistent growth, operation in sectors that are out of favour with the markets and sector-specific issues have contributed to the fall in PSU market capitalisation.

“Most PSUs are not in businesses that the market favours at the moment such as IT and pharma. They are in the traditional manufacturing businesses,’ said G Chokkalingam, founder, Equinomics.

Lack of interest from foreign funds that invest according to the ESG (environmental, social, and corporate governance) 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 other factors are exogenous, such as falling oil prices.

However, some analysts believe there is scope for PSUs to do well.

“The PSU share of profits (in the BSE500 pool) rose from 18 per cent in FY18 to 28 per cent in FY21, after consistently declining from 39 per cent in FY11. The negative spread of the return ratio of BSE PSUs against the BSE500 has narrowed considerably from -700 basis points (bps) to -100 bps, said Dhananjay Sinha, head – strategist and economist, JM Financial said in a note. He added that despite this, the gap in the market cap for BSE PSUs has continued to drift lower to 9 per cent from 20 per cent three years ago.

“Considering all these factors, we believe there is scope for reasonably good returns from PSU stocks, in companies that can ensure significant changes in their operating and governance performance, especially in the context of the disinvestment programme,” Sinha said.

According to Prabhakar, professional managers with longer tenure could help PSUs to turn around. “There is no continuity in management; many CEOs retire within six to eight months of taking charge. Now the government has started a fixed term for the top managers.”

Some analysts said the government should be selective when it comes to privatisation.

“Hindustan Zinc’s privatisation happened when the overall market capitalisation was Rs 1,000 crore. And today, the market capitalisation stands at Rs 1.43 trillion and the government has a 30 per cent stake. Oil and gas and defence-related companies are not the themes that the market favours at the moment. The government should look at privatising minerals, mining and logistics companies. The government should also keep some stake. In that way, they will continue to get a slice of the pie,” said Chokkalingam.