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News flow on privatization boosts PSU stocks, but some risks persist

The government has set a target of raising Rs80,000 crore in 2018-19 by selling stake in state-owned firms, with strategic divestment of 24 CPSEs on the cards, and privatisation of Air India on track. Photo: Pradeep Gaur/MintPremium
The government has set a target of raising Rs80,000 crore in 2018-19 by selling stake in state-owned firms, with strategic divestment of 24 CPSEs on the cards, and privatisation of Air India on track. Photo: Pradeep Gaur/Mint

  • The BSE PSU index has gained 27% in 2021, as opposed to an 8% increase in the broader BSE Sensex
  • In near- to medium- term, markets will be eyeing privatization of three entities: Air India, BPCL and LIC

Shares of public sector unit (PSU) companies are finally getting some limelight. The BSE PSU index has increased by as much as 27% so far this calendar year.

This compares well with nearly 8% increase seen in the broader BSE Sensex index.

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A key factor driving sentiment for the PSU stocks is the increased focus on privatization. “After raising 1 trillion via the Exchange Traded Fund (ETF) route over FY19 and FY20 (key technical reason for PSU valuation discount to widen), the government stopped the practice in FY21, which has reduced the equity supply pressure. Government shifted over to a policy of privatization from 2019 onwards," said Jefferies India Pvt. Ltd analysts in a report on 2 March.

Declining overhang
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Declining overhang

In a recent speech, Prime Minister Narendra Modi emphasized on more privatization.

Nitin Rao, founder of alphaideas.in, an investment blog, said: “From a near-to-medium term perspective, the market will closely look at the privatization of BPCL, Air India and Life Insurance Corp. of India".

BPCL stands for state-run oil market company (OMC) Bharat Petroleum Corp. Ltd. BPCL’s privatization process is picking up pace with the approval of its stake sale in Numaligarh Refinery Ltd. BPCL shares hit a new 52-week high on Tuesday on the NSE.

In the February 2021 budget, disinvestment target for financial year 2022 has been pegged at 1.75 trillion. It’s worth noting here that the government has met its disinvestment target only on two occasions in the past 12 years.

“In general, for PSU stocks, the re-rating could well be in multi-year cycles hereon if the government’s privatization efforts are successful. It will demonstrate that the government of India is really walking the talk," said Rao.

Prime Minister Modi has said there are plans to monetize government-owned assets worth 2.5 trillion. As such, the road ahead does not look smooth.

Kotak Institutional Equities’ analysts wrote in a report on 1 March: “The government’s proposed privatization plan for PSUs may not fully achieve the objectives of the majority (government) or minority shareholders. We see two issues with the proposed plan— (1) the list of strategic sectors is quite long; four broad sectors are more like 10 sectors and (2) many strategic PSUs face serious disruption challenges."

“The government can and should also consider the option of privatization through non-strategic divestment to institutional and retail investors," the broking firm added.

To be sure, relatively firm marketing margins are also boosting sentiments for the other two OMCs—Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd.

Further, State Bank of India’s shares are about 19% higher than their pre-pandemic highs seen in January 2020. Analysts believe the bank will be a key beneficiary of improving economic activity. For Oil and Natural Gas Corp. Ltd, higher crude prices have augured well.

Meanwhile, some are cautious on the prospects of PSU stocks. As Mahantesh Sabarad, head of retail research at SBICAP Securities Ltd, said, “It is good if privatization takes place but as we know, progress has been painfully slow. In any case, even from a profitability point of view, many PSUs have been inefficient in delivering returns to investors."

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