Explained: How PSUs became the biggest laggards on Indian bourses

With the share price of ONGC, one of India’s most valued public sector undertakings (PSUs) till recently, falling to a 15-year low, the focus has shifted to central government-owned firms which have become some the biggest laggards on the Indian bourses.  

The combined market capitalisation of 62 PSUs, at around Rs 15.4 trillion, is the lowest in nearly four years and excluding State Bank of India, their market capitalisation is the lowest since March 2009 (see chart).

The PSUs’ market capitalisation is down 17.6 per cent in the current fiscal year against 4.3 per cent rise in the benchmark NSE Nifty 50 index during the period. Excluding State Bank of India — now the largest PSU by market capitalisation— the PSU index is down 21.4 per cent since the end of March last year.   

In the last three-years, the PSUs market capitalisation has declined at compounded annual growth rate (CAGR) of 7.1 per cent Rs 19.2 trillion at the end of March 2017 to Rs 15.4 trillion at the close of trading on February 18, 2020. In the same period, Nifty 50 index appreciated at an anualised rate of 9.7 per cent.  

Government companies’ numbers look even worse if State Bank of India is excluded. SBI has been an outperformer with 18.4 per cent annualised growth in market capitalisation in last three-years.

Excluding SBI, PSUs combined market capitalisation is down 28 per cent in last three years making them one the biggest wealth destroyers in the country. Shares of ONGC which joined the club of value destroyers this week, started falling after its acquisition of HPCL in January 2018.

Analysts said the main reason for ONGC's stock fall was its weak performance in the December quarter. “The acquisition of HPCL for Rs 37,000 crore in cash has not gone well with the investors. This was the main trigger why ONGC stock is showing a declining trend,” said an analyst with a foreign brokerage asking not to be quoted. 

The PSUs’ under-performance on bourses to a mix of poor earnings and negative sentiment around government owned companies. "PSUs earnings growth has not been very encouraging in last few years but investors even avoiding PSUs with good earnings due to a negative sentiment around government ownership," says G Chokkalingam, founder & MD Equinomics Research & Advisory Services. 

 

In the last five-years, PSUs combined revenues — including banks & non-bank lenders — grew at a CAGR of 4.8 per cent growing from Rs 23.55 trilliion in FY14 to Rs 29.74 trillion in FY19. In the same period, their combined net profit declined from record high of Rs 1.5 trillion in FY14 to Rs 60,300 crore during year ending March 2019.

Public sector banks have seen the biggest decline in profitability in the last five years. 

PSUs’ lenders including listed NBFCs reported combined net loss of Rs 57,000 crore in FY19 against net profit of Rs 65,500 crore in FY14. Together these lenders have lost nearly Rs 1.34 trillion in last five-years.

Investors have also been put-off by a falling cash reserves of non-banks PSUs and their growing indebtedness. The combined cash reserves of PSUs (ex-bank & financials) declined to 15-year low of Rs 85,000 crore at the end of March 2019 down 51 per cent in last five years from Rs 1.74 trillion at the end of March 2014.

Many PSUs have also been forced to make fresh borrowings either to fund capex, acquisitions of other PSUs or to pay special dividends leading to a steady deterioration in their balance sheet ratios.

The net debt to equity ratio of non-financial PSUs hit an all-time high of 0.71x at the end of March 2019 against 0.62x a year ago and 0.44x at the end of March 2014. 

PSUs net debt more than doubled in last five-years to Rs 6.02 trillion at the end of March 2019 against Rs 4.98 trillion a year ago and Rs 2.96 trillion at the end of March 2014.

This the analysts say has put-off many investors who prefer low debt or debt free companies in sectors such as consumer goods.  

“But while talking about the PSUs, one has to also keep in mind the rise in IRCTC share which has gone up by 6 times since its listing in October last year – making its investors very happy,” said an analyst with a foreign brokerage. As on Wednesday, the IRCTC stock has a market valuation of Rs 29,290 crore with GoI holding 87 per cent stake in the company.