'Govt-owned firms' performance deteriorated in 5 years'

A big disinvestment push by the National Democratic Alliance government could add depth to the capital markets and help revive the economy, said Motilal Oswal, chairman of brokerage firm Motilal Oswal Financial Services.

"The markets are certainly expecting big-ticket PSU (public sector undertaking) share sales in the next Budget, apart from increased allocation to infrastructure, controlling inflation and foreign direct investment in more sectors," Oswal said.

"With a pro-reform government at the Centre, investors are expecting India to go back to 9-10 per cent growth in four to five years. Imagine the rise in market capitalisation if LIC or Indian Railways are listed on the market," he added.

Motilal Oswal Financial Services said aggregate sales and profits of PSUs grew in 2009-2014 at just a third of the rates during 2004-2009. Over a third of the PSUs, 34 per cent, were making losses in 2013, compared with 27 per cent in 2008.

"The profitability of PSUs, plagued by project delays, policy paralysis and high debt, is almost half the 2003-04 level," the report added.

To contain the fiscal deficit and improve economic efficiency, the report said the government needed to disinvest more. Reviving PSUs may not be enough because the government would need funds to prop up economic growth. "The market is already taking note of the revival, and cash-based volumes have almost doubled since March," Oswal said.

"We expect the government to continue divesting in profitable and core PSUs while retaining its majority holding in banks, ONGC, Coal India, GMDC, NTPC, PowerGrid, etc. It could sell significant stakes in, or even privatise, PSUs like Concor and Balmer Lawrie," the report added.

With the NDA once again in power, privatisation could gather steam. However, given the turnaround of Gujarat's PSUs, the NDA could attempt to resurrect profitability before divestment, the report said. "If right policy decisions are taken, PSUs' profitability should improve. The PSUs we believe will see a sharp upturn in profitability, and consequently a significant re-rating, include BHEL, BPCL, SBI, NTPC and ONGC," it added.

"Investors should not use the prevailing market valuation of a PSU as a benchmark. Instead, the focus should be on discovery of the true value of the underlying business, which will be achieved with reduction in government control," the report said.