Between a private and public sector company's stock, many are likely to choose the latter. Why? These have government backing, and hence, are perceived as safe and investor friendly. These companies also pay dividends despite making losses.
However, these factors are not viewed as positive enough any more. Most experts say investors should be concerned about public sector units (PSUs) in the present market conditions. Take, for instance, Life Insurance Corp, which bailed out the government’s divestment programme, PSU banks’ asset quality suffering from debt issues with aviation, power and infrastructure sectors, among others. There are around 80 listed PSUs. The government holds between 15 and 99 per cent stakes in these companies.
“There are many factors stacked against PSUs at the moment, such as the government’s arbitrary behaviour. It seems to be acting without keeping in mind minority shareholders. Those who hold PSU scrips should rethink. While there are some exceptionally attractive ones, by and large, most seem headed for trouble,” says Saurabh Mukherjea, head of institutional equities at Ambit Capital.
|FACT SHEET Returns (%)
|State Bank of India
|Union Bank of India
|Bank of India
|BSE Oil & Gas
|Indian Oil Corporation
|BSE Power and Infrastructure
|Power Grid Corp of India
|Hindalco Industries Ltd
|BSE PSU Index
|*Share price as on data May 22, 2012 Source: BS Research Bureau
Most PSU stocks are bleeding as investors are shying away on the back of weak market sentiments and uncertainty over government policies. A wave of negative news over the past years on corporate governance, policy paralysis and environmental clog have made the market jittery. These companies pay dividends because of the government’s mandate. Most decisions taken by the management of PSUs have to go through the ministry concerned. And, solutions to the problem may not always be the best.
These stocks are likely to lag for a while. The government needs to address critical issues urgently. For instance, lack of environmental clearance and ban on mining have affected power and steel companies. I
In the past year, the Bombay Stock Exchange PSU index has lost 21 per cent, while the BSE Sensitive Index or Sensex lost 12.5 per cent and the National Stock Exchange benchmark Nifty lost 11 per cent. Several banking stocks, which form a major chunk of the PSU basket, have fallen sharply, with State Bank of India (SBI) losing 17 per cent.
Explains Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities, “PSUs are in strategic sectors and an economy under pressure is bound to pressurise PSUs. Especially PSU banks; stay away from these. For instance, any debt issues with airlines or power companies will deteriorate the asset quality of SBI, though its earnings were good. This is not the case with private banks.”
Returns show private company shares have fared better than their public sector counterparts (see table). For instance, among power and infrastructure companies, while BHEL has lost almost 50 per cent, Siemens has lost a comparatively lower 22 per cent. In the oil and gas space (except Reliance Industries), Petronet LNG has lost two per cent, whereas Bharat Petroleum lost a little over 15 per cent.
However, investment experts are not advising against PSUs for the long term. Take the case of PSU oil marketing companies, where the oil subsidy burden is not likely to ease anytime soon, says G Chokkalingam, chief investment officer of Centrum Wealth Management. “With oil prices soaring and India importing, the oil subsidy burden may only rise,” he says.
Experts are concerned about the PSU banking space. These banks bail out many companies in trouble, including PSUs. This could result in these entities sitting on possibly huge non-performing assets.
Some experts are also averse to infrastructure and metal stocks for this calendar year due to high debt, environmental issues and low capex spends.
Overall, experts advise moving out of PSU stocks even if it entails booking losses. Certified financial planner Suresh Sadagopan advises exiting these companies and investing in private companies with clear cash positions. The loss will only be notional, as one will be investing the money taken out in a company that has a better potential of returns than a PSU.