PSU stocks lose steam while market holds

NSE PSE index and PSU Bank index down 8% and 11% in a month; commodity-linked firms also hit

Stocks of public sector undertakings (PSUs) have begun to fall, even as the overall market has managed to hold its own.

The PSE index on the National Stock Exchange has lost nearly eight per cent over the past month; the NSE PSU Bank index has dropped 11 per cent. While its benchmark index, the Nifty, has gained 1.5 per cent in this period.

State-owned companies in the banking and commodity space have borne the brunt. While the banking sector has been weighed down by bad loans, a fall in global commodity prices has adversely impacted the latter.

Bank of India and IDBI Bank are the top losers among PSUs, both down a little over 20 per cent in the past month. Shares of Bharat Heavy Electricals and Power Finance Corporation fell 19 per cent and 18.4 per cent, respectively. Oil and Natural Gas Corporation and GAIL lost 10.4 per cent and nine per cent each.

Market participants expect the stocks of state-owned banks to be under pressure in the near to medium term. with the Reserve Bank of India (RBI) tightening the pressure on non-performing assets.

“The fears of markets about public sector banks (PSBs) writing off the top bad loans seems to be coming true. Banks were delaying the creation of provisions for these loans until now. However, with RBI now playing an active role, these banks will have to take haircuts,” said Sunil Shah, head of research, Axis Securities.

Commodity-linked companies are expected to experience heat in the medium term. Brent crude oil is $46.84 a barrel, lowest price in seven months. And, investors are increasingly becoming wary of the proposal to merge the three state-owned oil marketing companies — Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum.

“The stock prices of all the three OMCs have corrected since the news flow on possible realignment in the sector. This correction in the OMC space comes despite the strong dividend yields and inexpensive multiples,” said Harshvardhan Dole, vice-president at IIFL Institutional Equities.

Coal India, a heavyweights of the NSE PSE index, has been impacted by lack of demand. While its dispatch growth had increased merely 1.9 per cent in May over a year before, production has been declining for the past three months.

Although PSUs as an asset class could be under pressure, there are still bright spots worth investing. For instance, BEML, whose shares have gained 7.2 per cent in a month, could be a good bet, thanks to attractive valuations and good business model, analysts say. Indraprastha Gas and PNB Housing finance could also be good options, by analyst recommendations.

This underperformance of PSU stocks comes after the same state-owned players outperformed the benchmark indices during FY17. Experts say the latter performance was largely on account of a smaller base; in FY16, all PSU stocks were battered by a slump in global commodity prices. Some of the metal and oil stocks had fallen as much as 20 per cent during the period.

Illustration by Ajay Mohanty