Finance Minister Nirmala Sitharaman in last year’s Budget took a strong stand in favour of privatisation and continuing disinvestment despite protests from labour unions. This may have contributed to a step-up in stock performance of already attractively-valued Public Sector Undertakings (PSUs), with the BSE PSU index delivering a one-year return of 51.2 per cent --- the 5th best return among major indices -- and almost triple that of the BSE Sensex, which represents the top 30 listed firms in India.

Similarly, a basket comprising shares of Central Public Sector Enterprises (CPSEs) has gained 42 per cent, beating the broader market. In the upcoming Budget, expectations continue around PSU and CPSE sector reforms, while there is quite a bit of focus on aggressive asset and divestment/strategic sale announcements.

While 5 per cent of the planned ₹1.75 lakh crore disinvestment money (FY22 Budget Estimates) has been realised so far amid pandemic disruptions, large disinvestment transactions offer some visibility now. This is with regard to privatisation of a general insurance firm as General Insurance Business Act has been cleared, BPCL, IDBI, two state banks (Banking Laws (Amendment) Bill, 2021, draft is ready) and LIC IPO.

What remains to be seen is whether political stability/state election results again hold the key for execution. If the reform-oriented current regime shows the intent to soldier on, irrespective of state poll verdicts, this will be taken very positively by the markets. Reiterating the government’s commitment towards privatisation will, of course, be sentimentally positive. At the same time, the government may be expected to clarify its stance on taking equity stakes in embattled telecom firms at a time when it is paring control in healthy PSUs.

The already announced National Monetisation Pipeline (NMP) envisages an aggregate monetisation potential of ₹6-lakh crore through the leasing of core assets of the Central government in various sectors over a four-year period (FY2022-25). Investors await setting up of the framework for NMP asset transactions, and a clear timeline of how the ₹6-lakh crore target will be achieved over the next few years.

Ahead of the Budget, reports surfaced that government-controlled firms have been asked to declare market value of land, other real estate assets. This is a bid to boost investor confidence in many PSU stocks, which trade at single-digit price to earnings valuation multiple (at a big discount to private sector peers). The Budget may contain similar steps that will help lift the valuation of PSU stocks. In last year’s Budget, the government’s decision to monetise surplus lands of state-owned companies through sale or concessionaire model was expected to make prime commercial properties available for development. Hence, eyes are on how these deals will be executed.

In the absence of sustained robust price performance of PSU stocks, the government has resorted to milking the cash-rich PSUs by taking dividends. This has created a situation where many PSU stocks, trading at cheap valuations, sport high dividend yields --- making them even more attractive to conservative equity investors. But, above-average dividend payouts cannot be maintained for long in the absence of fast-paced earnings growth. Also, cash taken by way of dividends caps the ability of such companies to invest for growth. Hence, the Budget must announce steps to boost the earnings growth of PSUs and CPSEs, with clear outcomes and timelines.

Key expectations
More PSU and CPSE sector reforms
Aggressive asset, divestment/strategic sale announcements
Measures to boost earnings growth of state-owned firms