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The returns from PSU stocks failed to match their counterparts in the private sector in the last one year that saw the market post a modest gain across a broad spectrum of stocks.
A negative overall annual return during this period ensued, with the former unable to match gains posted by private players when prices across stocks went up in the first half of the year and following it up by losing much more than the latter in the second half, as the market corrected its initial valuation. This is in contrast to its performance during fiscal 2008 and 09 – a period of all round gloom in global equity markets – when PSU stocks suffered lower losses relative to the broader market index.
The BSE PSU index lost 2 per cent in the one year ended March 25, 2011 as compared to 4.3 per cent gain in the broader market benchmark BSE 500. The private companies in the BSE 500 have actually given a 7 per cent return to investors.
Surprisingly, it is not the usual suspects – oil companies – which have dragged down the returns of the PSU pack, but metal companies such as SAIL, MMTC, STC and Hindustan Copper, which have lost 30- 42 per cent in one year.
The market sentiment in these stocks was more upbeat in March 2010, on ‘divestment' hopes, as they featured a high government ownership; but the divestment offers have not yet materialised. These stocks have in fact seen their weight in the PSU index halve from 18.6 per cent to 10 per cent in one year.
Other index heavy weights such as NTPC, Power Grid Corporation and Neyveli Lignite too have faced losses of 8-30 per cent, on a loss of investor fancy for power stocks due to execution delays.
Despite the year seeing as many as 12 new entrants to the PSU basket with mega-issuances of Coal India apart from MOIL and SJVNL, PSUs did not expand their overall share in the market's capitalisation to a significant extent. The proportion is at 28.6 per cent.
Investors sanguine
Though PSUs have generally failed to match private companies on stock market returns this past year, investors seem to be sanguine about their prospects.
The BSE PSU Index improved its price-earnings multiple – the amount that investors are willing to pay for acquiring a rupee of earnings – to 15.7 times now from 14.9 times a year ago.
If the risk-return trade-offs that investors make have not changed in the interim – a reasonable assumption to make for short-term assessment – the higher multiple implies that investors expect a growth in earning in the future.
In contrast, the PE multiple for the market as whole which includes private players as well has fallen from 20 to 18 in the same period. The reasonable earnings performance of non-oil PSUs, which managed a 16 per cent profit growth in the past 12 months and the cash rich nature of PSUs may have helped them command better multiples.
Surprisingly, oil marketing companies BPCL, HPCL and IOCL have been among the gainers over the past one year, as the tentative move towards “decontrol” of petrol prices helped their valuations. PSU banks were the other key exceptions, managing a weighted return of 33 per cent in the past year, despite weakening in recent months.
A new entrant to the PSU pack – Coal India – thanks to rising coal prices globally has outperformed since the time it got listed and now commands an 11.8 per cent weight in BSE PSU index, next only to ONGC.
The performance raises questions about whether PSU stocks continue to retain their earlier sheen as ‘defensive' investment options.
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