Beat sectoral returns by 5 percentage points annually, PSUs told

The Centre has asked public sector undertakings (PSUs) to increase their share price by over 5 percentage points annually over and above the BSE sectoral index. The move is an effort to improve PSUs market capitalisation. 

The criterion has been included in the Memorandum of Undertaking (MoU) that the government signs with the PSUs under the parameter on market cap improvement. The improvement in PSUs share price will be evaluated based on the annual average.

According to the evaluation guidelines shared with PSUs, daily movement in market capitalisation based on the closing price of their shares will be compared with improvement or decline in the comparable BSE sectoral index. In case the increase in PSUs’ daily share price is of 5 per cent, and the broader sector index has risen by 4 per cent, the PSUs improvement would be considered as 1 percentage point(5-4) for that trading session.

This daily improvement will be added for all trading days in the financial year to compute annual achievement by PSUs.

PSUs would be positively rated if they achieve at least 2.5 percentage point increase in their share price over the BSE sectoral index. This means they would be have achieved half the stated target if their share price grew by 7.5 per cent while the BSE sectoral index increased by 5 per cent, showing a 2.5 percentage point rise. 

PSUs have also been told that the dividend distributed by them would also be considered to evaluate their performance on this parameter. 

In case of unlisted PSUs, earnings per share would be used to evaluate their performance. Unlisted PSUs’ profit after tax would be divided by the number of outstanding shares including any fresh issuance of shares to judge their performance.

Meeting of parameters specified in the MoU decides the quantum of Performance Related Pay (PRP) the employees of PSUs are entitled for. Top PSU heads Business Standard spoke to said market discounts PSUs’ share price as any government directive is seen impacting profits. 

Due to social obligations of PSUs, they are made to pass on profits to consumers in some way or the other, leading to investors finding private players’ stock attractive. 

Improving share price by 5 percentage points, they said, is a “difficult target, tantamounting to stock price manipulation”. This is mostly aimed at helping the government in garnering high divestment receipts if they opt for minority stake sales, they said.

However, experts believe it isn’t true that stocks can be re-rated only through stock market manipulation.

The step would nudge PSU management to think about value creation for long term shareholders, said Sandeep Shah, managing partner at NA Shah Associates LLP. 

There is a scope for re-rating of PSU stocks if there is more transparency in the way their operations are undertaken, said Shah. There should be clarity about the government’s divestment plan with some assurance that the divestment driving strategy is not detrimental for the long-term investors, added Shah.

Investors are looking at clarity whether there is a planned divestment in next 2-5 years and the philosophy behind it. 

“They are skeptical of investing in PSUs thinking that the government may divest its shares in PSUs by offering a discount which is detrimental for long term investors.

Besides this, PSUs should share their long term outlook, expansion plan and government’s directive on social objectives with investors frequently, which will instill confidence among investors,” Shah said.

The government, being the promoter of PSUs, is well within its right to ask these commercial enterprises to work towards improving their share price, said RS Sharma, former chairman and managing director of Oil & Natural Gas Corp. If PSUs have to compete with their private peers, they will have to work towards improving investor confidence through outreach programs, Sharma said.

“Even as the actual performance of PSUs is paramount, they should start sharing their growth plans with investors through investor calls, which would help them in building their market capitalisation,” said Sharma.

BID TO BOOST M-CAP

• PSUs to be positively rated if they achieve at least 2.5 percentage point improvement over the BSE sectoral index
• Daily improvement to be added for all trading days to compute annual achievement by PSUs
• Earnings per share to be used to evaluate unlisted PSUs’ performance
• Investors seek clarity whether there is a planned divestment in next 2-5 years