BackPSU stocks disappoint in Modi govt’s first year
The laggards have been government lenders who have been weighed down by bad loans and poor profitability
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Mumbai: Benchmark equity indices, which surged in the run-up to the general election last year, gained further through the first year of the Narendra Modi-led government, but state-owned enterprises failed to capture the investors’ imagination.
Over the last year, since the Bharatiya Janata Party (BJP)-led government came to power, the BSE Sensex has gained 14.2%. In contrast, the BSE PSU Index, a grouping of state-owned firms, has lost 6.1%. The index had risen 16.8% and 4.9%, respectively, in the two years prior, before declining in the last one year.
Three-fourth of the 60 public-sector unit (PSU) stocks have given negative returns in the last one year. In the year leading up to the elections, the PSU Index had traded higher on hopes that a renewed focus on economic reforms would benefit some of these firms. A year on, while stocks of some state-owned enterprises like those in the defence and oil and gas sectors have benefited, others like state-owned banks have languished.
“The government’s performance has been a mixed bag with respect to market expectations. Consensus did have extremely high expectations. One needs to realize that in India things don’t move very fast. There are challenges at every step," Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, the arm of Kotak Securities Ltd, said over phone from Singapore.
To be sure, some reforms and initiatives announced by the government have benefited individual stocks, leading to a surge in their market value. National Buildings Construction Corp. Ltd saw its stock rising 183.8% and was the best performer among state-owned stocks as it benefited from the government’s focus on housing and infrastructure, analysts said.
Bharat Electronics Ltd and BEML Ltd rose 111.3% and 66.6%, respectively. The government raised defence foreign direct investment (FDI) from 26% to 49%, and manufacturing of low tech and mass equipment could attract investment initially, Macquarie Research pointed in its 19 May report.
Oil refiners, barring Indian Oil Corp. Ltd, which dipped 1.4% in the last one year, also did well. Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd notched 40.8% and 46.2% gains, respectively, over the past year, benefiting from the government’s decision to put an end to subsidies on products such as diesel.
More needs to be done, said Sanjeev Prasad. “In the energy sector, despite a correction in crude oil prices, the government has not been able to put in place a transparent subsidy sharing mechanism. The government did deregulate diesel prices, but much remains to be done. There were also hopes that the government would put in place a gas pricing structure that would benefit the gas producers in India. But the gas pricing formula which was ultimately put in place, led to a price which was lower than the market’s expectations," said Prasad of Kotak.
“Some refiners did well. Since the deliveries in the energy sector did not meet with expectations, we did not see much of the benefits in terms of stock price rises in this sector," he added.
The laggards within state-owned enterprises have been government lenders who have been weighed down by bad loans and poor profitability. While the government has given these banks greater operational flexibility and said that it is willing to reduce its holding in the banks to 52%, investors have not been enthused.
Central Bank of India was the best performer among state-run banks with a 66.7% gain, while State Bank of Bikaner and Jaipur and State Bank of India followed next with 22.4% and 12.5% gains, respectively.
The list of worst performing PSU stocks in the last one year was topped by five banks—Jammu and Kashmir Bank Ltd, UCO Bank, Indian Overseas Bank, Dena Bank, and United Bank of India, that dropped between 38.6% and 43.7%.
Public sector banks have put out a mixed bag of quarterly results. Some showed signs of recovery even as others continued to lag owing to slow business growth and mounting bad loans. On 14 May, the Reserve Bank of India (RBI) governor Raghuram Rajan warned that the quantum of bad loans in the Indian banking system may not have peaked yet, echoing the concern of analysts and bankers.
Strong show in Gujarat
Investors had expected PSUs to catch up, given Modi’s track record of turning around Gujarat’s state-run companies, during his tenure as the state’s chief minister.
In a note on 22 April 2014, brokerage firm CLSA said some successful turnaround stories from Gujarat such as Gujarat State Fertilizers and Chemicals Ltd (GSFC), raise hopes for the likes of MTNL (Mahanagar Telephone Nigam Ltd) and PSU banks.
The report had pointed out that GSFC was an ailing company with a ₹ 400 crore loss in fiscal 2003, and Modi gave a free hand to the top bureaucrats in negotiating a turnaround without any political interference, leading it to a 15% RoE (return on equity) last year.
During Modi’s term as Gujarat CM from 7 October 2001 to 21 May 2014 many prominent Gujarat state PSUs significantly outperformed the BSE PSU index and the benchmark equity index Sensex.
While the BSE PSU Index gained nearly 867.36% in the period and the Sensex rose 778.65%, prominent Gujarat PSUs Gujarat Mineral Development Corp. Ltd, GSFC, and Gujarat Alkalies Chemicals Ltd have risen 3,704%, 3,372.60% and 2045.14%, respectively.
Other prominent Gujarat PSUs —Gujarat Industries Power Co. Ltd and Gujarat Narmada Valley Fertilizers Chemicals Ltd—had risen by 594.17% and 341.74%, respectively.
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