Mumbai: Stocks of state-owned companies that have traditionally been ignored by investors are outperforming their private sector peers in the latest rally, propelled by policy changes and the potential value creation from the government’s divestment programme.
The rally, in which the Bombay Stock Exchange (BSE) benchmark, the Sensex, has surged 26% from 16,022 points on 25 May, has seen public sector units (PSUs) beat even their sectoral indices, a Mint analysis shows.
Also See | The tale of two rallies (Graphic)
Between 25 May and 8 October, India’s largest lender State Bank of India gained 50% to Rs3,244.9. The gain is better than the 39.24% rise posted by its closest private sector rival, ICICI Bank Ltd. Similarly, state-owned explorer Oil and Natural Gas Corp. Ltd has outperformed Reliance Industries Ltd, India’s biggest refiner, handsomely.
Government measures such as deregulation of fuel prices, cheaper valuations and the expected value creation from the divestment programme will drive PSU stocks further, analysts say. Some predict that this could be the beginning of a long-term trend in which the stocks of these state-owned firms get rerated and create more value for investors.
“Foreign institutional investors who are coming in are attracted by the scale and size of these PSUs, which are better placed in their sector than most of their peers,” said Dhiraj Sachdev, senior fund manager, HSBC Global Asset Management India Ltd. “Further, these stocks are available at a heavy discount, offering a higher margin of safety for investors.”
After the stock-market crash in 2008 and scams such as the accounting fraud at Satyam Computer Services Ltd, investors have become more conscious about governance issues, analysts said. A perception that PSUs are better governed than private sector entities has helped their stocks’ performance.
“There is a clear case of revaluation of PSU stocks now,” said Anish Jhaveri, group CEO at Antique Stock Broking Ltd. “In this entire rally, investors are picking stocks on the basis of quality of governance, management, earnings visibility and clarity in balance sheets. Going forward, PSU stocks in the mining and mineral space are likely to outperform private peers.”
Even large-cap PSU stocks, which are still underperforming state-owned peers such as NTPC Ltd and Bharat Heavy Electricals Ltd, are fast catching up.
This is in sharp contrast with the earlier rally, in which the Sensex rose from 8,169 to 16,000 points between 8 March 2009 and 25 May. PSU stocks then underperformed their private peers by considerable margins.
As a result, the gap between the performance of the BSE PSU index and the Sensex has narrowed considerably.
Between March 2009 and May, the Sensex gained 96% while the BSE PSU index gained 84%. In the latest rally, the gap was reduced to just four percentage points. While the Sensex gained 26%, the PSU index rose 22%.
Later this month, the government plans to launch its largest and most ambitious public offering—the initial public offering of Coal India Ltd. The Rs15,000 crore IPO, which is expected to see Coal India enter the Sensex and Nifty indices, will have a big impact on the weightages of fund managers.
“With the Coal India IPO, the way we have looked at PSUs is likely to undergo a big change,” said Mehraboon Jamshed Irani, senior vice-president at Centrum Broking Pvt. Ltd.
“The weightage of PSUs in the total market capitalization will go up. With Coal India taking its place in key indices, the weightage of PSUs as a group will also go up. Composition in the index plays a key role in analysts and fund managers rerating a stock or a group of stocks,” he said.
HSBC’s Sachdev agrees the divestment plans and reforms agenda spelt out by the government has already led to a rerating of large-cap PSU stocks as the market is discounting the value that will get unlocked.
“This trend will continue and with the front line stocks as benchmark, the second and third line stocks also will get rerated,” he said.
Some analysts see it as a temporary phenomenon driven by sector-specific developments such as PSU banks winning market share from private sector lenders and oil companies benefiting from deregulation.
“In the banking space, many lenders had a lot of ifs and buts which are no longer there,” said V.K. Sharma, head of private broking and wealth management at HDFC Securities Ltd. “So, there was huge potential of better price discovery, which is happening now. The PSU oil stocks have rallied only because of the government freeing pricing of oil. So we can say that the rally has been more because of the government’s policy changes. But, going forward this trend may not continue. If crude price goes up, RIL will also gain.”
A fund manager at a broker-owned portfolio management service said the PSU outperformance was not a long-term trend shift.
“Many of the inherent problems of PSUs continue to persist. However, in the short term investors are seeing value in these stocks because valuation looks more stretched in other stocks. But, the upside (for PSU) looks limited,” said the fund manager, who didn’t want to be named.
Sanjay Sinha, CEO of L&T Investment Management Ltd, said the rally in PSU stocks is sector-specific. “At this time, the market is more likely to consolidate, and engineering and capital goods stocks will lead the rally thereafter. So, different set of PSUs will gain, but there may not be a specific trend,” he said.
Graphic by Yogesh Kumar/Mint