PSU stocks may be re-rated on divestment hopes but face a bumpy ride


Public sector companies may see a re-rating of their stocks on hopes that the government’s divestment plans will gather steam following the successful sale of Air India to Tata group. Such processes may, however, not be smooth as any privatization of government-owned assets typically take longer periods.

The government announced the first privatization after 19 years as Tata Sons won the bid for Air India, bringing to a close a long-drawn disinvestment process.

“We believe this is a positive macro event for India and has the potential to re-rate the PSU disinvestment candidates, which anyway trade at attractive valuations, given the backdrop of a strong rally in the market,” said Gautam Duggad, head of research – institutional equities, Motilal Oswal Financial Services Ltd.

He expects privatization to get a big boost after the Air India deal and that it would be followed up with the rest of the planned divestments. “This augurs fairly well for other big-ticket divestment items, such as BPCL, SCI, Pawan Hans, as well as LIC IPO,” he said.

Stocks of public sector undertakings (PSUs) have rallied this year, tracking a record gain in the broader market. These shares look poised to beat the Nifty this year for the first time in five years.

The Nifty PSE index has gained 51% in 2021 so far, surpassing Nifty, which has surged 30%. In the past three years, Nifty PSE has been underperforming the benchmark. In 2020, 2019 and 2018, Nifty PSE slumped 13%, 5% and 21%, respectively, compared to the gains of 15%, 11% and 3% of Nifty during the same period. From March 2020, Nifty PSE rose 101% against the Nifty’s 116% gain.

This month, Nifty PSE index surged 9% till Tuesday followed by a sell-off in the past three days, while Nifty rose 3%. Some of the big PSU gainers this month are MSTC, IRCTC, Hindustan Copper, Union Bank and National Aluminium Co., which surged 30-65%.

On Tuesday, Indian Railway Catering and Tourism Corporation Ltd become the ninth PSU to join the elite club of 1 trillion market capitalization with its shares rising more than 300% so far this year. However, the stock has been facing heavy selling pressure as it lost 16% since Tuesday.

Kotak Institutional Equities said, however, that the privatization policy may preclude most of the larger PSUs and the Centre has yet to identify the next set of firms for privatization. The long-pending privatizations of BPCL and Container Corporation of India will take at least another 9-12 months for completion as the Centre is yet to seek expressions of interest for these PSUs, the brokerage said.

“We believe many PSUs, irrespective of their size, risk irrelevance given their presence in challenged industries with a bleak future (fossil fuels) and challenging industries seeing rapid transformation (financials). We doubt the companies are sufficiently geared to meet the challenges; continued government ownership may handicap them further. Anyway, we do not see much merit in sectors such as energy, financials and telecommunications being classified as strategic,” it said.

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