Elephants' march
Upward movement in PSU scrips has been driven by fundamentals
| This upsurge in PSU stocks has resulted in the BSE's PSU index outperforming the broader markets, with returns of 208 per cent over the last four years. And it's not just because IT was at a high in 2000. |
| The other sectoral indices have also not been able to match the performance of public sector scrips, with BSE's healthcare index rising 34 per cent to 2200.9 this year and the consumer durable index dropping 26 per cent to 890.8. |
| Why have PSU stocks outperformed the broader markets? No doubt the government's recent disinvestment in PSUs has brought greater investor attention to this sector. However, the real answer lies elsewhere - PSUs seem to have shed their old mentality and it has been replaced by focusing on improving operational and financial performance "" sales and net profits of leading PSUs have shown a sharp improvement in FY03 compared with FY01. Aggregate sales of the largest public sector companies have grown 16 per cent annually to Rs 162,584.9 crore in March 2003. Meanwhile, tight cost controls through an improved supply chain, reduction in employee costs via VRS schemes and a reduction in bank financing charges has helped PSU profitability to triple to Rs 15705.95 crore in FY03. |
| Net profits of ONGC in FY03 have risen 190 per cent as compared to FY00 to amount to Rs 10,529.33 crore, while BEL's have grown 141 per cent to Rs 260.61 crore. And in the case of SAIL, losses have shrunk 82 per cent to Rs 301.78 crore. This trend has continued even in the results for the quarter ended December 03 "" sales have grown 8 per cent to Rs 47,942.69 crore and profitability has risen 21 per cent to Rs 4,409.31 crore. |
| Clearly, PSUs have restructured and brought down their cost structure, and their dominant market position in some industries has led bulls to take large positions on these stocks. It is apparent that this rise in PSU stocks has been driven by fundamentals rather than just the government's disinvestment programme. |
| Analysts point out that if Indian PSUs can replicate their Chinese counterparts who have grown their overseas sales aggressively by expanding in the key American markets, valuations could reach even higher levels. |
| Is the repo rate too high? |
| Are the huge amounts of money parked by banks in repos with the Reserve Bank perhaps an indication that the repo rate, at 4.5 per cent, is too high? This question is also underscored by the fact that parties other then the RBI offer repos in the 3-4 per cent range. |
| Moreover, the yield curve at the short end of the curve is highly distorted with the yield on the 91-day treasury bill being 4.20 per cent and that on the 364-day bill at 4.27 per cent. Both are substantially below the repo rate. For these reasons, the repo rate has long been discarded by market participants as a benchmark for the short-term rate. |
| On the other hand, market observers point out that even with the inflation rate dropping to 4.91 per cent, the real effective interest rate on repos continues to be negative. And, going forward, the outlook on inflation is not good, with oil and commodity prices continuing to climb. Globally, the consensus view till recently was that interest rates have bottomed out, and indeed the Australian and British central banks had raised interest rates, but if the Euro comes under renewed pressure, the European central bank may have no alternative to reduce rates. |
| The crux of the matter is the excess liquidity in the system, the result of continued dollar inflows. The trouble is that while the lack of government securities in RBI's kitty is leading to the huge subscription in one day repos, it is also resulting in a major cost burden on the RBI's balance sheet. |
| The proposed market stabilisation bonds will help mop up the liquidity, but dealers point out that the amount of Rs 60,000 crore for this fiscal year mooted for these bonds is not enough to take care of the dollar inflows. (Total foreign exchange reserves in the last one year have increased by Rs 1,43,000 crore). |
| Perhaps the standing deposit facility over and above CRR stands out as the most feasible option, but that has hit a legal road block, since, for RBI to accept deposits outside the purview of CRR and offer an interest rate on that will require an amendment to the RBI Act. An option that has been deliberated in the report and suits the situation is lengthening the maturity of the repo to 7 day and charging 4.5 per cent. That will force market players to think before locking in the money for 7 days. |
| With contributions from Amriteshwar Mathur and Anindita Dey |