In the rally since March 2009, BSE’s PSU index has doubled in value, rising from the 4,700 levels to 9,600 currently. While that looks impressive, the broader market represented by the BSE-500 index has risen by as much as 164%.
The underperformance of the PSU index since the United Progressive Alliance government first came into power in May 2004 now stands at 28.4%, with the PSU index rising by 155% in the six-and-a-half-year period and the broad market index gaining by 256%.
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While this has caused a dent in the returns of PSU stocks if one were to consider a 10-year horizon, it has far from negated the sharp outperformance in the three-and-a-half-year period prior to May 2004. In terms of 10-year returns, the BSE PSU index has risen by over 11 times, outperforming the return of the BSE-500 index by as much as 90%.
Some of this outperformance has been on account of a greater divestment activity. But as a report by Macquarie Research points out, it has been supported by fundamentals as well, with return on equity of PSU firms improving by as much as 12 percentage points in the past decade. The catch, however, is that thanks to the outperformance, valuations of these companies are now on a par with those of private sector firms, according to Macquarie’s estimates.
With an increasing number of PSU initial public offerings (IPOs) and follow-on offers, it makes sense for investors to keep this in the back of their minds. So far this fiscal year, PSU paper worth more than Rs20,000 crore has been issued. Besides, based on media reports and filings with the market regulator, issuances by PSU firms would top Rs1 trillion in the next 18 months.
Macquarie’s report titled Government is selling, but is it worth buying? points out that while the government may be timing the sale of shares right, from an investor’s perspective, there need to be substantial reforms for the performance of PSU firms to improve from current levels. While PSU firms earlier enjoyed easy pickings thanks to monopolistic positions in certain industries, this advantage has come down considerably with increased liberalization.
The recent pleasant experience with Coal India Ltd’s IPO is likely to strengthen the belief among investors that PSU paper comes cheap. But keeping in mind that valuations are comparable to private sector counterparts,and that it would be a tall order for some of these firms to match the performance of private sector companies, one can’t always assume that stock issuances by the government are always cheap.