70 PSU Stocks To Invest Or Not

Once you put all the central government run Public Sector Undertakings (PSUs) or Public Sector Enterprises (PSEs) under a scanner and look at them closely through the eyes of retail investors, first questions comes to mind is whether these companies' stocks are worth to stay invested in or even buy afresh. None has an iota of doubt about roles played by the PSEs when it comes to contributing towards building a stronger, better and brighter nation but then over the years, their efficiencies, capabilities have been challenged by their private counterparts. Retail investors also most of the times shied away from investing in PSEs' stocks. But things are changing fast during last few years. A massive cleansing operation has been initiated to clean the score-books of the public sector banks, another operation has been kicked off to make the PSEs more efficient, professionally managed and also investors' friendly. We find this is the right time to take a closer look on these stocks and come up with this report.

The central public sector enterprises are ‘the faces of the Indian economy' as they contribute about Rs. 1,428,865.80 crore towards full market capitalisation of BSE CPSE Index and a free float of Rs. 383,119.12 crore. Meanwhile, we look at the returns delivered by the central public sector enterprises over the past one year. The BSE CPSE Index has outperformed the benchmark indices i.e BSE Sensex. The below graph explains how Rs. 100 invested PSUs in October 2015 has grown on to become Rs. 123.32 i.e representing a growth of 23.32 per cent in a year as against Rs. 107.47 in BSE Sensex.

GDP math for PSUs

In the FY17 Budget, the Centre declared a 17 per cent increase in public capex, equating to 3.7 per cent of GDP. The government plans to more than double the pace of road construction over the next five years, raise rail investments to 5.7 per cent of GDP over FY16-FY20 from 2.4 per cent over the last five years. The union cabinet also cleared port-led development projects worth Rs. 2.45 trillion which is around 1.6 per cent of GDP.According to RBI, public capital expenditure emerges as the significant multiplier effect on GDP rising from 2.1x in FY13 to 3.84x in FY16. The budgeted public capital expenditure by the Centre and PSUs could add 0.9 per cent points to FY17 GDP growth.

PSUs contribution towards economic development

PSUs are one of the most important pillars of strengths as they have contributed immensely towards the economic development of the country. Public sector companies have spread their presence across the length and breadth of the country which has made them an important source of economic livelihood for the economic welfare of the country. PSUs operate in all most all the business verticals which are of strategic importance to the country be it defence, agriculture, resources, engineering etc.

Divestment Plans

Government readies plan for big-ticket stake sale in 22 PSUs in the current fiscal year. The list includes companies that are profitable and some that aren't but have big asset bases. The key criterion is that none of them are engaged in areas that are strategically critical for India

Offer for Sale

Niti Aayog report on strategic disinvestment in profit-making public sector units (PSUs identified the companies that will be put up for sale and is expected to work jointly with Department of Investment and Public Asset Management (DIPAM) to take the plan forward. The proposed sell-off programme has a two-pronged strategy

NITI Aayog is working on another list of divestment after submission of first list of PSUs for closure or sell off to the government. It had submitted two separate lists of sick and loss-making PSUs - one comprising those that can be closed down and the other of those where government can divest its stake. The government will bring down its stake to 49 per cent or below in such PSUs.

Government has set a disinvestment target of Rs. 56500 crore for the current financial year. Out of the target, Rs. 21000 crore has been achieved. Government kick-started the disinvestment programme for the current fiscal with 11.36 per cent stake sale in NHPC. The government raised Rs. 2700 crore through the process. It has lined up as many as 15 PSUs, including Coal India, NMDC, MOIL, MMTC, National Fertilisers, NALCO and Bharat Electronics for stake sale in the current fiscal.

During H1FY17, the government also has been able to achieve 37 per cent of the combined target and 58 per cent of the minority stake sale and buyback target. The five PSUs, whose boards had approved the buybacks earlier this year are Coal India, NMDC, Nalco, Manganese Ore (India) and Bharat Electronics.

Financial front of CPSEs

We have analysed financials of 45 central public sector companies for the first quarter of FY17. The topline of these companies dropped by 10.16 per cent to Rs. 318358 crore in Q1FY17 as compared to same period in previous financial year. However, CPSEs' operating profit has increased by 7.92 per cent to Rs. 65510 crore in Q1FY17 on yearly basis. These companies operating profit has eased out because of 16.87 per cent reduction in raw material prices and 1.7 per cent reduction in employee expenses in Q1FY17 on year-on-year basis. These CPSEs' bottom line also rose by 3.25 per cent in Q1FY17 as compared to the same period in the previous fiscal year.

On quarterly comparative front, CPSEs' revenue has increased 0.27 per cent to Rs 318358 crore in Q1FY17 as compared to previous quarter. These companies' operating profit boosted by 30.59 per cent to Rs. 65510 crore in Q1FY17 on quarter-on-quarter basis. CPSEs' net profit also rose by 23.22 per cent to Rs. 32001 crore in Q1FY17 as compared to previous quarter.
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Financial front of PSBs

We have analysed financials of about 24 public sector banks for the first quarter of FY17. The topline of these banks declined by 3.95 per cent to Rs. 205821 crore in Q1FY17 as compared to previous quarter. These banks' NIM remained unchanged at 2.37 per cent in Q1FY17. Their interest earned decreased by 1.53 per cent to Rs 176735 crore in Q1FY17 on quarterly basis. The total expenditure reduced by 8.37 per cent to Rs. 43606 crore in Q1FY17 on quarter-on-quarter basis. PSBs' operating profit before provisions and contingencies also decreased by 5.02 per cent to Rs. 37867 crore in Q1FY17 on quarterly basis. Meanwhile, their provisions and contingencies expenses dropped by 43.54 per cent to Rs. 41373 crore in Q1FY17 as compared to previous quarter. PSBs' net loss has narrowed down to Rs. 2869 crore in Q1FY17 from net loss of Rs. 23341 crore in Q4FY16.

On yearly basis, PSBs' total income increased by 1.61 per cent to Rs 205821 crore in Q1FY17 as compared to same period in previous financial year. These banks' NIM stood at 2.37 perf cent in Q1FY17 against 2.45 per cent in Q1FY16. Their interest earned decreased by 2.78 per cent to Rs. 176735 crore in Q1FY17 on yearly basis. These banks' operating profit also rose by 6 per cent to Rs. 37867 crore in Q1FY17 on year-on-year basis. PSBs' provisions and contingencies expenses has increased by more than double to Rs. 41373 crore in Q1FY17 as compared to same period in previous fiscal year. These companies posted net loss of Rs. 2870 crore in Q1FY17 against net profit of Rs. 10451 crore in Q1FY16.

On asset quality front, PSBs' asset quality deteriorated further in Q1FY17. These banks' average gross NPA stood at 11.2 per cent in Q1FY17 as against 9.28 per cent in Q4FY16 and 5.76 per cent in Q1FY16. These banks' net npa stood at 7.21 per cent in Q1FY17 while 5.93 per cent in Q4FY16 and 3.55 per cent in Q1FY16.

Capital Infusion in PSBs

The Finance Ministry has set various parameters for getting capital support. Those who fulfil the criteria post third quarter results would be eligible for further capital infusion. The government in July, 2016 had declared the first round of capital infusion of Rs. 22915 crore for 13 banks.

The amount is being released to provide liquidity support for lending operations as also to enable banks to raise funds from the market.

Consolidation of PSBs

Indian Government's (Baa3 positive) proposal to consolidate the country's PSBs creates risks that could offset the potential long-term benefits. India's banking system has witnessed an increase in stressed assets since 2012, with the result that no PSB currently has the financial strength to assume a consolidator role without risking its own credit standing post-merger.

The consolidation of Indian PSBs is to strengthen the banking system. State Bank of India already started consolidation process to merge with six banks. Meanwhile, from a credit perspective, industry consolidation would strengthen the banks' bargaining power, help save costs and improve supervision and corporate governance across the banking system. The government's ultimate aim is to reduce the number of PSBs to about 8-10 from the current 27.

CPSE Future Outlook

Though the current mood appears gloomy due to dampened situation of CPSEs. The profitability of these companies is subdued for first quarter of the current financial year. We have given outlook for these CPSEs as positive, negative and hold type for coming future. We have considered valuation parameters such as trailing twelve months (TTM) EPS, TTM PE and PB. We also have considered dividend yield and book value for companies while assessing the outlook for the companies.

On the other hand, for PSBs there are worsened asset quality concern as piled up stressed assets. Banks' profitability hampered from last financial year. Though there is optimism on the part of government of India and Reserve Bank of India with respect to cleaning up of the banks' balance sheets through various initiatives which in all probability likely to yield positive result in the coming months. We have considered various valuation parameters while giving outlook as positive, negative and hold. We have taken gross Non-Performing Assets (NPA) and net NPA in percentage terms as well as in absolute amount for Q1FY17. We also considered net interest margin (NIM) for latest quarter i.e. Q1FY17. PB multiple, dividend yield has also been factored in our analysis when coming down to our outlook on the companies for our reader's interest.

Therefore, we concluded that even though the pain points remains in terms with the performance of public sector enterprises, however, the are many brighter pockets which are likely to reward investors in the coming years as country's economy shift gears forward.

Gautam Duggad
Head of Research, MOSL

"Government has identified revamp of PSU enterprises as one of its priorities and therefore, various actions initiated on management changes, capital infusion, stake divestments, sale of loss making PSU etc. are a step in that direction. We expect sectors like PSU Banks, Oil & Gas, Commodities to be touched by those actions of government. These are clearly positive steps so far as it helps improve the business efficiencies and competitive positioning of those franchises and brings sharper focus on delivering value for all stakeholders. From an investment perspective, it will depend on a specific action which government takes for the identified specific company and can't be generalized as such."

Rajesh Cheruvu
Director - Head of Equities Sanctum Wealth

In recent times, outlook for public companies appear to be improving, primarily due to lessened interference from incumbent government and encouragement of company managements to take business decisions keeping business interests in mind. This combined with filling up of the leadership roles with external talent helps these companies to regain their historic glory. Also, merger of loss making units with bigger PSUs or closures helps government to optimize public resources. Central bank and government's emphasis on cleanup of PSU Banks' balance sheets too leads to improved optimism on their existence and partial recovery in valuations. Net-net, continued independence of the management and efforts of balance sheet improvement should help improve market's perception further and ease cost of capital in the medium term. Historically during the phase of economic reforms PSUs have outperformed broader markets.

Prabal Basu
Chairman & Managing DirectorBalmer Lawrie & Co.

How important is the logistics vertical for Balmer Lawrie?

The logistics vertical is extremely important for the company as it presently (FY2015-16) constitutes approx. 20% of the revenues and 53.5% of the profits of the company. There are also immense opportunities for growth in this sector and thus the vertical is likely to continue to play a significantly important role in Balmer Lawrie's overall growth story over the next 10 years and beyond.

How much money the company is planning to invest in its logistics infra & services business over the coming future?
We intend to invest about INR 250-300 cr over next 3-5 years in the areas of Multi Modal Logistics Hub (MMLH), Temperature Controlled Warehouse (TCW), ICD/CFS and project logistics to drive significant growth and build capabilities in our logistics business.

What would be the impact of GST on the company?

As of now we don't see any major impact of GST on our businesses. Moving forward, when the detailed rules and regulations are clear and are in place, we would know the actual impact. However, we are closely monitoring the developments on GST and have initiated required actions to be GST ready by the time it is rolled out.

Recently the company was successfully able to turnaround its tours & travels business. What potential do you envisage in this business given the positive economic outlook of the country? Also how much this business will contribute to the top line?

The tours and travel business in the country is likely to grow at the rate of 8-10% Y-on-Y in the next five years or more. We too expect to grow at a similar pace in line with the industry. Our Travel & Vacations Business Unit is at the moment the largest contributor to overall company's topline and we have been focusing on providing the best in class travel solutions to our customers. Our recent emphasis of expanding in the leisure segment of the tours business is now showing positive signs of growth which has potential to contribute to the vertical's overall bottom line significantly.

How are the company's cold- chain plans shaping up given the government's renewed focus on warehousing and associated infrastructure? 

Our Cold Chain Venture with Temperature Controlled Warehouses (TCW) is shaping up pretty well. In the first phase we had planned to set up three TCWs in Hyderabad, NCR and Mumbai respectively. The one at Hyderabad is fully operational and the others at NCR and Mumbai are in the project stage and are expected to be operational by next year. With these three facilities Balmer Lawrie will be able to offer 13,500 Pallet positions for perishable cargo to be stored in Temperature Controlled environment. With introduction of newer/more facilities at other strategic locations across India and other value added services, our medium to long term goal is to establish ourselves as an end to end pan India cold chain player.

Sanjiv Bhasin
Executive Vice President, Markets, IIFL

"Capital infusion into PSU banks to shore up capital after AQR has greatly helped. Sale of loss making PSU in full will see good capital raising. Change of managemnt with excellent new heads in select PSU banks has seen market cap jump sharply -Canra Bank & Bank Baroda are good examples. Dilution of stake in NBCC/ Hind copper etc will also raise market float and see Government get out of businesss which are not co-related to them. Very bold, pragmatic and forward looking steps to enhance market cap, give more autonomy for running/ managing and sell off loss making PSU to get value of core assets namely land banks."

To Invest or Not - 70 PSU Stocks

We have considered a broader financial look towards the Central Public Sector Enterprises (CPSEs). While considering action on these stocks, first quarter of current financial year was considered. Though there are lot of concerns over stressed assets making rounds when it comes to the PSBs, government and RBI are trying to aid these banks to breath freely and to resolve the burning issue of NPAs by end of the current fiscal year. One more thing can't be ignored that dividend yield for PSEs are attractive enough as compared to private listed companies. BSE CPSEs have given 2.99 per cent dividend yield against benchmark 1.39 per cent. BSE CPSE index is trading at PE multiple of 15.5x times against BSE Sensex's PE multiple of 21.34x times. BSE CPSE index is trading at PB multiple of 1.75x times against BSE Sensex's PE multiple of 2.89x times. One can look at the broader tabular information given below for taking investment decisions on the 70 PSUs.