PSUs yet to experience Narendra Modi’s Gujarat magic wand effect
4 min read 26 Feb 2016, 10:30 AM ISTWhile Sensex has dropped 4.75% since the NDA's sweeping win on 16 May 2014, BSE PSU index has dropped 22.46% in the same period
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Mumbai: State-owned enterprises have performed much worse than the benchmark index ever since Narendra Modi took charge as the Prime Minister of the country in May 2014, contrary to earlier beliefs that he may be able to turn such companies around, as was the case during his tenure as the chief minister of Gujarat.
While BSE’s benchmark Sensex has dropped 4.75% since the National Democratic Alliance’s (NDA) sweeping win on 16 May 2014, BSE PSU index has dropped 22.46% in the same period.
Of 57 stocks of public sector undertakings (PSUs) in the BSE PSU Index, 40 are down since the general election results on 16 May 2014, while only 17 are in the green. Also, six state-owned banks topped the list of top losers among PSU stocks.
Of the 40 that are down, 23 PSU stocks have erased all the gains from the a pre-election rally that had started from mid-September 2013, when Narendra Modi was announced as NDA’s prime ministerial candidate.
“The scale of the challenge is really bigger on pan-India basis, as compared to state level of Gujarat," said Saurabh Mukherjea, chief executive of Ambit Capital Pvt. Ltd.
Mukherjea pointed out that PSUs of large magnitude such as Oil and Natural Gas Corp. Ltd (ONGC), Bharat Heavy Electricals Ltd (Bhel) and Steel Authority of India Ltd (SAIL) have turned out to be much harder to tackle.
“It is often heard that PSUs have decades-old issues like inefficiency and corruption. The fact that the Gujarat model couldn’t be replicated on the pan-India basis, shouldn’t come as a surprise, simply because of the scale of the challenge at hand," Mukherjea said.
In a note on 22 April 2014, brokerage firm CLSA had said some successful turnaround stories from Gujarat, such as Gujarat State Fertilizers and Chemicals Ltd (GSFC), had raised 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 top bureaucrats in negotiating a turnaround without any political interference, leading to a 15% RoE (return on equity) in 2013.
During Modi’s term as Gujarat chief minister from 7 October 2001 to 21 May 2014, many prominent Gujarat PSUs significantly outperformed the BSE PSU index and the benchmark Sensex index.
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.
Currently, though, tumbling commodity prices and a slow pick-up in economy also kept the sentiment weak for companies at large in the country.
Another point was the regular supply of such shares in the market, as the government pushed through its divestment program.
“In most PSU stocks, there is a constant fear of supply, as the government has to proceed with divestment program. The regular supply pressure caps the valuation upside in the PSUs," said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd.
Also, barring State Bank of Bikaner & Jaipur, all other 22 state-owned banks in the index have fallen since the election results, largely due to the piling pressure on their asset quality.
“PSU banks are coming under pressure due to concerns related to NPAs (non-performing assets). The market is factoring that there is continuous pressure of NPAs, and hence most banks are trading below book value," said Shah of Kotak.
Shah pointed out that while the government was trying to improve the governing structure of PSU banks through schemes like Indradhanush, the market is waiting for results.
“While a lot of steps are taken to recognize NPAs, recovery of NPAs is something which the market is watching out for," Shah said.
Shah also expressed concerns about the additional worry on unfunded pension liability of PSU banks, which is not even recognized, and added that the amount could be fairly large.
The Indian banking sector is in the midst of one of the biggest clean-ups of bad loans in recent times. Reserve Bank of India (RBI) governor Raghuram Rajan has given banks until March 2017 to clean up their books.
As part of this clean-up, RBI has asked banks to recognize stressed assets early and come up with a plan for resolution and recovery. Gross NPAs of 39 listed banks surged to ₹ 4.38 trillion in the quarter ended 31 December 2015, from ₹ 3.4 trillion at the end of the September quarter, according to data collated by corporate database provider Capitaline.
“There is no doubt that there is deep surgery on the banking side. RBI’s direction to provide for NPAs was a bold move and led to taking all the knock upfront. This was politically a difficult step, but definitely a right one," said Nirav Sheth, head of research at Edelweiss Securities Ltd.
A few stocks did perform well though.
National Buildings Construction Corp. Ltd shares clocked 250.29% returns and it was the best performer among state-run stocks. Analysts attributed the benefit to the government’s increased focus on housing and infrastructure.
State-run oil marketing companies such as Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd added 85.14%, 65.11% and 23.92%, respectively.
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