A Buy case for PSUs over Pvt Companies

Reflection:

  • BSE PSU Index inching closer to low levels of 2009.
  • If global & domestic conditions improves back, returns from PSU’s would be superior.
  • India can’t progress without the participation of PSUs.

Last 5 year were terrible for PSU companies and their stock prices. They lost the pace of growth with private companies, and were the big dragger for the collective index – Nifty.

Nifty_PSU_Index

PSU Index, has very high weight age of Oil & Gas sector 33%, BFSI 23%, Metal & Mining 18%, Power 17% and Capital Goods 5%.

Collectively these 5 sectors accounts for 96% of the market cap of the index.

 

What Explains the underperformance of PSUs ?

  • Havoc in International Crude prices directly impacted Indian Oil & Gas companies as well.
  • Corporate NPA plagued PSU Banks.
  • Falling commodity prices impacted entire Capital Expenditure cycle for Metals, Power and Capital goods companies.

Overnight banks can’t come out of this mess, similarly it may take considerable time for Capex cycle to resume its old pace, and there are early sign of crude bottoming out.

If things improves in next 5 years  to the level where it was 5 years back (Year 2011), there are good chances that PSUs will outperform the market. In other words, this hypothesis is based on mean reversion theory.

 

Importance of PSU’s for Economy:

To substantiate the importance of PSUs, we can note things, like there can be no substitute of State Bank of India, which has PAN India connectivity. In India, 30% of ATMs are of SBI (PSU Bank ATMs are 72% of the Total). There are many such PSU companies which will have to exist in their healthier shape, if India need to progress. India can’t progress without the participation of these PSUs.

Most of these companies operates in Industries, which can be loosely termed as monopoly. These are the companies which generate cash for government in various form (dividends, stake sale etc), so government will always not only rescue but augment  their growth.

It would be difficult to think substitute of ONGC, Coal India, NTPC, IOCL, BPCL, HPCL, GAIL, NTPC, Power Grid, NHPC, Oil India, SAIL. Most of them play key role in nation building and their capacities which built over several years, cannot be easily replicated by the private companies.

And most of these companies face relatively less Technological Risk from a small non-existent player.

We have witness the disruptive role that e-commerce is playing against the way many traditional businesses were run. Entry of a Baba in FMCG space is creating a lot of fuss among the existing well established players. Such kind of risks are not there in the most of the sectors where PSU operates.

PSU’s are no doubt very inefficient, but at the same time they operate in the environments where no other private players can operate. And many times their profitability are caped for the larger interest of country.

On a Regression analysis, there is good upside for BSE PSU, wen compared with Nifty.

Regression_PSU_Nifty

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