 "Making sense of PSU stocks rally: This graphic explains the Modi connection")
Just last year, the government was struggling to raise money through its holdings in public sector companies but about a year later, the companies have acquired a new sheen purely thanks to the optimism that the new government will turn things around for them, so much so that stocks of PSUs are outperforming the larger market.
Public sector units have typically done poorly over the last decade with an IIFL report dubbing it their ’lost decade’ given their share in the top 100 stock market index of the Sensex has shrunk from 32 percent in 2005 to 20 percent this year. The decade, which cover the UPA government’s tenure, has largely been blamed on poor policy, corruption and inaction by the brokerage.
It also points out that while national public sector firms struggled, those in Gujarat managed to outperform thanks to a certain chief minister named Narendra Modi. And they have a fairly simple explanation for why this happened: autonomy.
“The state government provided complete autonomy to the company managements, allowing them to take decisions purely on business merit and without any political or social agenda,” it notes.
Here is a graphic that show how much profit the Gujarat state-owned companies garnered even as it was a lost decade for the central PSUs.
The report notes that some of the PSU companies may be the best placed to witness a jump in profitability because the near monopoly they enjoy in their respective sectors. Provided the government devises right policies and set conditions, the stock ofthese companies can jump as much as 49 percent in a year, the report has noted.
It’s this optimism which is perhaps fuelling the listed public sector units to the highs that they have been hitting.
Noting the sudden optimism in PSU stocks, Vikas Vardhan of Value Research noted that what had changed about the perception of PSUs was that Modi didn’t speak about selling off the struggling public units but turning them around like he had done with similar industries in Gujarat.
He noted:
All talks of disinvestment has taken a back seat and what we are staring now is the possibility of PSUs getting into shape and becoming profitable
This is how the S&P BSE PSU Index has performed since 8 May till 13 June:
The index has also outperformed the Sensex for the same period, notching up almost double the growth the Sensex has seen since 8 May. (The election results rally started on 9 May.)
As a result of this rise in the PSU Index, ETFs investing in the sector have risen equally fast over this period. A JP Morgan report has analysed the PSU ETF index and discovered that it has been rising as well mirroring the rise in this sector:
A lot of this has more to do with what the government is expected to do and the Modi government will have to deliver on its promise of reforming public sector units quickly. The Gujarat model for PSUs may have worked its magic in the state, but failure to do so on a national scale could well see the ’lost decade’ for national public sector units extend for much more time.
