Don't look away from public sector stocks

Better order flows, reform initiatives and softening of crude prices have helped these stocks, which were once sidelined, post gains

Often, stocks of public sector undertakings (PSU) do not bring much cheer to investors and these stocks have been sidelined due to scepticism surrounding them. Historically, factors such as low free float for investors, weak operational performance and unpredictable growth rates have deterred investors from taking a bullish stance on the PSU stocks. If investors had built their portfolio comprising only PSU stocks (stocks constituting the S&P BSE PSU index) in the past two years and held on to them, their portfolio of 57 stocks would have yielded 40 per cent returns compared with 30-share S&P BSE Sensex’s returns of 22 per cent since January 2014.

If PSU banks are excluded, the gains are double. The average return of the portfolio of PSU stocks, excluding the banks, is 77 per cent in the past two years.

Stellar returns
Among the 32 non-bank stocks, 20 have delivered stellar returns beating not only the Sensex by a good margin but also stocks of their private sector peers. Contrast to the bearishness surrounding the capital goods and realty sectors, stocks such as NBCC, BEML and Bharat Electronics Limited have emerged the biggest gainers in the past two years. From Rs 155 in the start of 2014, NBCC is now at Rs 997. Likewise, BEML from Rs 238 in January 1, 2014 is now at Rs 1,284 and BEL has zoomed from Rs 340 levels to Rs 1,305. A steady inflow of orders, primarily from the government, their execution abilities and its resultant improvement in their financial performance have helped these stocks post multi-fold returns.

Stocks of oil refining companies such as HPCL, Chennai Petroleum Corporation, BPCL and IOC have also been among the gainers since January 2014, yielding positive returns of 100-250 per cent in the past two years, thanks to deregulation of retail fuel pricing, cut in subsidy burden aided by lower oil prices and reform measures, and thirdly improving profit margins led by better macros. These in turn have led to strong operating performance for these companies. Surprisingly, even as markets were not too optimistic about the prospects of power sector, stocks of SJVN and Power Grid Corporation have yielded positive returns of 47 per cent and 40 per cent, respectively, in this period.

The laggards within the PSU basket have been stocks in the metals and mining space with significant exposure to exports market/global trends such as GMDC, SAIL and NMDC which have declined by 20 per cent to 36 per cent since January 2014. Stocks such as ONGC, MMTC and BHEL whose sectoral outlook continues to remain depressed are also among the laggards. These trends are largely in line with the performance of the private sector companies operating in these segments.

Summing up the performance of PSU stocks, Nitin Bhasin of Ambit Capital attributes their outperformance to the reform measures put forth by the government in the past one-and-a-half years. “Stocks in the sectors where reform-related agenda was set forth (such as coal and power) and reform measures were initiated have gained positive momentum in the markets.”

“Apart from reforms, certain global factors such as softening crude oil have also played a part in helping some of these stocks such as the oil refineries,” he adds.

Commitment to reforms initative key
Experts believe that for the bull-run in PSU stocks to continue, it is crucial the government stays committed to its reforms initiatives and the impact of these reforms get reflected into their financial performance. Assuming oil prices remain soft, oil marketing companies should continue to do well. Likewise, those in the capital goods and defence segments such as BEL, BEML and NBCC as well as power sector like Power Grid should scale higher.