Sensex at 30,000: No PSU in top 5 cos, RIL leads rally with 40% gain

As the S&P BSE Sensex breezed past the 30,000 mark on Wednesday to settle at all-time high levels, the rally from the recent December 2016 lows has been mostly led by Reliance Industries (RIL) that has gained nearly 40% during this period. Surprisingly, none of the public sector undertakings (PSUs) have made it to the top five companies by market-capitalisation (market-cap) as the benchmark index achieved this feat.

ITC, HDFC, HDFC Bank and Larsen & Toubro are the other index heavyweights that pushed the benchmark in unchartered waters and form the remaining four in the most valuable by market-cap club. However, ONGC, State Bank of India (SBI) and Indian Oil Corporation (IOC) do form a part of the top 10 by market-cap, data show.

BSE PSU index has outperformed with a gain of 20% from market’s December low, compared to 16% rally in the benchmark index during this period. The rally in the index has largely been on account of an up move in RCF (up 90%), Rural Electrification Corporation, or REC, (up 74), followed by Bank of India, Vijaya Bank, Oriental Bank of Commerce (OBC) and Indian Bank that gained 54 – 71% during this period. 

Though analysts expect the markets to do well going ahead, excessive government control and asset quality concerns in some are some of the factors that deter investor from investing in these companies, they say.

“Earlier, ONGC used to be a part of this club, but has lost out given how the crude oil prices are behaving. The other companies have overtaken given the businesses they are in. The rally in PSU banks has been good, but they are saddled with their own problems of non-performing assets. Having said that, I expect the PSU banks to outperform but it will take time as they need to address their asset quality concerns,” says A K Prabhakar, head of research at IDBI Capital.

“As regards ONGC, I have doubts as they have invested heavily at a very high price in many assets. As a result, a spectacular growth in the near term is ruled out. Liquidity is another issue. Given that they are government-controlled enterprises, a major chunk of holding is with the State. That apart, there is excessive government control over the functioning in some, which is a deterrent for a number of investors,” he adds.

Traditionally, most of the PSUs have been cash-rich, which has added to their value. Off late, the government has been tapping into their cash resources to boost revenue for the exchequer. Experts believe the high amount of cash PSUs gave investors through dividends and buybacks could hold back capex growth of these companies going ahead.

The need to cut deficits and a lack of revenue buoyancy have pushed the government to rely more on disinvestments of / dividends from PSUs, which have increased from 4.3% of the government's net revenues in FY13 to 8.3% in FY17, reports suggest.

“Nearly 30% of non-bank listed PSUs have meaningfully increased pay-outs in FY17; several have already paid out large portions of their cash balances. Yet, the government hopes to make 8.8% of FY18 net revenue from its PSU holdings (up 14% y-o-y)," says Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch in a recent co-authored report with Anand Kumar.

“This is a tough bill to fill, but it may become ever more critical if the GST (goods and services tax) impacts core tax collections near term. The govt. may be forced to consider more radical means of extracting cash from its companies. Government creativity might produce some short-term beneficiaries (if any) – but in general it would be bad for PSU balance sheet and P&L (profit & loss account). Top down, this would be a basket best avoided over the next 12 months,” they add.