Thanks to the gravity-defying rise in stocks such as MMTC Ltd and National Mineral Development Corp. (NMDC), public sector unit (PSU) stocks are set to outperform the market by a handsome margin this calendar year.
Until the first week of November, a portfolio of 43 such government-controlled companies delivered returns of 116.5%, data collected from Capitaline Databases shows. This is much higher than the gain of 46% in the National Stock Exchange’s Nifty during the same period. Even if one were to exclude MMTC and NMDC (which have risen so much primarily because of their floating stock of less than 2%), the rest of the portfolio garnered returns of nearly 66%—about 20 percentage points higher than the Nifty. Prominent stocks such as Steel Authority of India Ltd (SAIL), Bharat Heavy Electricals Ltd (Bhel), State Bank of India (SBI) and NTPC Ltd have delivered returns of more than 76% individually.
While stocks in engineering and capital goods are in high demand because of strong order books, the rise in some other PSU stocks seems to be speculative. MMTC and NMDC are classic cases, but even SAIL now trades at a handsome premium to Tata Steel, although the latter would benefit more from higher steel prices because of the high operating leverage of Corus. The markets were betting that captive iron ores would help SAIL contain the rise in raw material costs, but the last quarter’s results show that rising prices of imported coal took much of the sheen away from the firm’s results.
Most PSU stocks have low floating stock, besides which some sectors such as banking have a cap on foreign investment. These factors lead to a mismatch in demand and supply, especially in a year when portfolio flows have been the strongest. Another factor for the relatively better performance of PSUs this year could be their underperformance in the previous two years. After the United Progressive Alliance government took over in mid-2004 and the Left parties ruled out disinvestment, PSU stocks underperformed the Nifty by 23% in 2005 and 2006. In fact, if one were to exclude MMTC and NMDC, the PSU portfolio has underperformed since, between December 2004 and November 2007, despite the relatively strong performance this year. During this period, only 11 PSU stocks outperformed the Nifty, while 32 underperformed or were ‘left’ out. In sum, PSU stocks still have a lot of catching up to do.
The Hindalco Industries Ltd share, down in the dumps for a long time, has seen a spurt, coincidentally at a time when Novelis Inc. has declared its results. Novelis now accounts for 70% of the consolidated Hindalco-Novelis combine and its performance is crucial for the Hindalco stock.
The September quarter saw Novelis’ pre-tax loss being trimmed to $23 million (Rs90.6 crore) on sales of $2,821 million, compared with a pre-tax loss of $154 million on sales of $2,494 million in the year-ago period. After writing back tax benefits, the company was able to post a modest net profit of $13 million for the quarter.
Some of the improvements were one-off in nature, such as a pre-tax gain of $21 million in tax credits as a result of a favourable court ruling in Brazil and a pre-tax benefit of $29 million on account of certain adjustments in accounting related to the acquisition. Nevertheless, selling, general and administrative expenses were reduced, exposure to contracts with price ceilings for the metal was reduced, and price and volume increases in Europe and South America also helped boost profits.
However, many of these reasons were also present in the management’s analysis of the June quarter results, when the net loss before tax was $114 million. But the management had claimed at the time that, after adjusting for all acquisition-related and other one-off items, the losses before tax were actually $18 million, compared with a pre-tax loss of $87 million for the June quarter last year. By that yardstick, the company’s pre-tax loss has actually increased in the September quarter from $18 million to $23 million. Production, too, at 747 kilotonnes, was lower than the 755 kilotonnes shipped in the June quarter.
Metal prices, of course, are the critical factor for Hindalco. Its stand-alone earnings before interest depreciation and tax in Q2 were lower by 7% compared with the year- ago period due to lower realizations and a stronger rupee. Since then, copper prices have fallen sharply. But aluminium prices are firm. The big question is the impact the slowdown in US growth will have on metal prices. Analysts believe aluminium will be the metal least at risk in the event of a global slowdown. These factors have seen the stock perk up. After all, Hindalco’s rise of 13.75% over the past month is dwarfed by the 17.81% rise of National Aluminium Co. Ltd over the past week.
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