Operative from February 1, 1999, it returned a gain of around 150 per cent when the Vajpayee-led NDA completed its term in office. Under Manmohan Singh’s prime ministership in the first term of the United Progressive Alliance (UPA) in 2004–2009, it rose a little over 180 per cent.
From then, the index has been a laggard, though still positive, during the UPA-II rule (2009-14). The gain, however, shrunk to about two per cent. At the current level of 7,093 points, it is back to where it was in 2012.
Experts point to multiple factors, including the constant news
of divestment and follow-on public offers. More importantly, it is largely constituted by companies in the oil & gas, power, infrastructure and banking sectors, all under pressure for a while. State Bank of India (SBI), Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC), Power Finance Corporation, NMDC and GAIL are some of the heavyweights in the index. Their earnings have remained under pressure for 12 to 18 quarters. Banking and infrastructure sectors have lately shown signs of improvement but there’s a long way to go before regaining investor confidence.
Illustration: Ajay Mohanty
Motilal Oswal Financial Services’ (MOSL’s) 23rd annual wealth creation study showed clear and continuous migration of value from PSUs to private entrepreneurs. Also, that PSUs' share of overall market capitalisation has more than halved from 36 per cent in 1998 to 15 per cent now.
Excess capacities built in the power, metals and mining industries, and bad loan-related stress for banking, do not seem to be going away in the immediate future. Also, with private players having capitalised on the weak pockets of their public sector peers, competition has significantly risen in the past three years. “PSUs continue to see their competitive advantage eroding,” MOSL mentions in its note. At oil and gas companies, production bottlenecks and volatile crude oil prices dampen investor sentiments for stocks such as ONGC, IOC and Bharat Petroleum.
Another factor working against the PSUs is the advent of consumer-facing or consumption-oriented businesses finding greater acceptance from investors. These include themes such as consumer finance, discretionary goods and consumer durables. With these pain points not expected to recede in the medium term, a recovery in investor demand for PSU stocks seems unlikely.
“Investors have to be stock-specific with PSU stocks,” says G Chokkalingam, managing director, Equinomics Research. “I don’t find value in at least two-third of the stocks, due to industry-related problems.”
However, experts say not all PSUs are alike in this. “Only those PSUs are creating wealth which face minimal competition from the private sector,” MOSL states in its report. These retain their relevance for investors. GAIL, Power Grid Corporation, SBI, LIC Housing, Bharat Electronics, Cochin Shipyard, Petronet LNG and NBCC have a near-monopoly or are market leaders in their domain. Their stocks continue to appeal to investors, including those abroad, for their size and scale of operations.