Market and Budget: Will the PSU boom continue beyond the Budget?

Market and Budget: Will the PSU boom continue beyond the Budget?

Market and Budget: Will the PSU boom continue beyond the Budget?

Analysts predict that PSU stock prices would continue to rise after the budget statements, although caution is urged for investors because to the high valuations.

The top gainers on the BSE PSU index over the last five years have been shares of Gujarat State Financial Corporation as well as Fertilizers and Chemicals Travancore.

In the five years since the Bharatiya Janata Party (BJP)-led National Democratic Alliance government has been in office, the proportion of public sector undertakings (PSUs) has skyrocketed as a result of consistent capital inflow into expanding industries like electricity, infrastructure, and railroads. costs associated with it. shield. Given the government's capital allocation for each pocket, analysts indicated that the outcome of this rise in the PSU pack would be dictated by the impending interim budget in the near future.

He did, however, caution investors against investing in these state-controlled companies since the prices of some of their equities seem to be much higher than those of their private rivals. The BSE PSU index has increased by more than 65% in the last year as a result of one in three PSU equities more than doubling in value.

Head of Kotak Securities' equities research Shrikant Chauhan anticipates a longer-lasting rise that would be more stock-specific after the release of the budget capex spending. According to him, investor confidence in the PSU pack has grown as the outcome of the state election bolstered expectations for the installation of a stable administration.

The privatization shift and investors' renewed faith in PSUs

When the BJP-led NDA government took office in 2014, it made an effort to push for PSU disinvestment; however, only two—Air India and Nilanchal Ispat Nigam—have been sold to private investors so far. The government will just sell its whole interest in one PSU to another in other strategic disinvestments. The ones that are now in the works, such as BEML, IDBI Bank, Container Corporation of India (Concor), and Bharat Petroleum Corporation (BPCL), likewise seem like far-off dreams.

Analysts claim that despite some PSUs' declining state of health, investor trust in these businesses has increased as a result of government initiatives to manage them more professionally.

Many PSU businesses, including NHPC, NMDC, Mazagon Dock, Rail Vikas Nigam, NTPC, and IRCON International, are operating more effectively currently than they were before, according to AK Prabhakar, head of research at IDBI Capital. "Employee costs along with effectiveness have improved across every one of PSU companies," he said.

'Privatization' in Practice: Can a delay or an overvaluation of OFS lower PSU value?

Kotak Institutional Equities analysts think the market is misguided in its expectations when it comes to PSU privatization. "One should be extremely cautious regarding making privatization an investment thesis for PSUs," the brokerage company said, citing the government's expressed strategy on PSU privatization, practical challenges seen in prior efforts at PSU privatization, and the high prices of PSUs. "

The government's attempts at privatization have previously been impeded by a number of real-world issues. Concor is one such example, when in order to facilitate privatization, the government had to amend many agreements between the parent Indian Railways and the port-hinterland connection operator. But even if the privatization was approved in November 2019, it hasn't occurred yet. Because the oil refining and marketing industry is in a decline, BPCL did not pique the attention of many prospective buyers. Experts in the market predict that delays can become worse since it will take time to locate the ideal buyer and deal.

Furthermore, the government desires a strategic disinvestment. PSU shares may lose value if the preferred method of disinvestment, the blind offer for sale (OFS), is used. According to the government, if investors are less inclined to subscribe to the OFS, this would eventually result in additional reductions, which will lower the PSUs' genuine worth.

In this budget, would the government raise or maintain its disinvestment target?

The government may limit the disinvestment revenues in this interim budget to less than Rs 50,000 crore, according to experts at rating agency ICRA. "It would be prudent that you configure a medium target of less than Rs 50,000 crore for FY2025 rather than a higher target, given the uncertainties involved in market transactions." This is to prevent any interruption or significant underfunding in the budgetary computations," he said.

The government only generated around Rs 10,000 crore from PSU disinvestment in the current fiscal year, falling short of the Rs 51,000 crore objective.

What may PSUs anticipate from this interim budget's capital spending schedule?

Because of the government's emphasis on fiscal austerity, the interim budget may see some decrease in capital investment; nonetheless, experts at Nirmal Bang predict that roads and railroads would get a larger percentage of the overall allocation. The brokerage company said that "railways is likely to see the highest increase in allocation, with spending increasing by around 40 per cent year-on-year in FY24."

In an effort to boost the economy after the epidemic, the government is giving capital spending first priority. There should be a steady rise in the allocation of capital spending starting in 2020–21.It is intended to increase by 35% yearly to Rs 5.5 lakh crore, then by 35% in 2022–2023 to Rs 7.5 lakh crore, and ultimately by more than 37%. In 2023–2024, the percentage increase would reach a record high of Rs 10 lakh crore.

Market analysts are optimistic about PSU equities due to the fact that capital investment has exceeded budget predictions for the last three years, but they caution investors to monitor political developments.

"While the PSU outlook for 2024 remains positive, we advise consumers to invest selectively as the sector's achievement largely depends on the political landscape and policy continuity," said Trivesh D., COO of Bengaluru-based online trading site Tradejini.

How ought an investor to handle PSU stocks? Worry about overvaluation, say experts

When compared to their counterparts in the private sector, many PSU equities are valued at a premium. For instance, according to Kotak Institutional Equities, a PSU company like Concor is trading at 36.4 times the one-year future price-to-earnings (PE) ratio, which is much higher than the 26.4 times PE multiple for Adani Ports and SEZ. Analysts have disclosed.

Steel Authority of India, a significant player in the metals and mining industry, trades at a one-year forward PE ratio of 13.4 times, higher than Tata Steel's 13.1 times. Additionally, he said that National Aluminum Company's one-year forward PE ratio was 14.2 times, greater than Hindalco's 11.7 percent.

Throughout the previous five years of the rule, how have PSU stocks performed?

With increases of more than 1,800% and 1,300%, respectively, Fertilizers & Chemicals Travancore and Gujarat State Financial Corporation shares have been the top gainers on the BSE PSU index during the last five years.

More than 500% returns were provided by other businesses, including IRCON International, Bharat Electronics, Tamil Nadu Telecommunications, Garden Reach, Orissa Mineral Development Company, as well as BHEL. Conversely, RITES dropped 5% during the same time, making it the sole loser in the BSE PSU index.