Govt should leverage PSU rally to maintain the pace of capex: Axis AMC

A well-executed PSU divestment strategy could yield far-reaching benefits for the Indian economy

The government should leverage the rally in shares of public sector enterprises (PSUs) to maintain the pace of capex while at the same time reducing its fiscal deficit, Axis Asset Management Company (AMC) has said in a report.

“By divesting in a staggered manner, reducing their holdings by 300 basis points each year, the government could generate over Rs 2 trillion (0.6 per cent of GDP) in capital receipts. This would help bridge the fiscal deficit and reduce net market borrowing,” the asset manager said.

A well-executed PSU divestment strategy could have far-reaching benefits for the Indian economy. “It could attract foreign investment, raise corporate governance standards, and generate funds for further infrastructure development and social welfare programs, thereby enhancing the dynamism and competitiveness of the economy,” the report said.

Almost all PSU stocks have rallied sharply over the past year. This stellar performance has helped propel their aggregate market capitalisation to Rs 67 trillion, which is about 17 per cent of India’s total market capitalisation. At the start of 2023, the combined market capitalisation of the PSU pack was just Rs 37 trillion.

Axis AMC believes this robust market environment presents a “compelling opportunity for the government to strike while the iron is hot.”

Despite this sharp uptick, the valuation discount of the PSU Index relative to the Nifty has merely returned to its long-term averages, Axis AMC observed.

Ashish Gupta, chief investment officer (CIO) of Axis AMC, said the re-rating in PSU stocks and their robust performance is underpinned by four factors. “The strong financial resilience of traditional economy sectors during the Covid-19 pandemic; government policies and reforms, such as defence indigenisation, benefiting companies in these sectors; a heightened focus on corporate governance, including formalised payout policies, balance sheet restructuring in public sector banks, a structured divestment strategy; and attractive valuations, with many firms reaching decade-low valuations and offering dividend yields surpassing those of debt instruments.”

Not just secondary share sales by the government, but the market buoyancy can also be used by state-owned banks to raise fresh capital.

To match this credit demand, banks in India will continue to need growth capital. “Our estimates suggest that PSU banks may need approximately Rs 2 trillion of growth capital over the next five years to sustain current loan growth rates. The market is now presenting a favourable opportunity for these banks to bolster their capital and meet their growth needs. This is evidenced by the successful capital-raising efforts of several PSU banks in the public markets, which have strengthened their balance sheets in recent months,” Gupta said.