Most public sector units, which had run up sharply before the new government came to power, are now trading lower over the past one year
A year ago, when the Narendra Modi government came into power, the stock market was euphoric. Along with better governance, investors were hoping that the performance of public sector undertakings (PSUs) would be improved by a wave of restructuring including empowering the management, cutting down waste and possibly closing down lossmaking companies. Unfortunately, reforming PSUs is nowhere in the agenda of the Prime Minister (PM). Lack of reforms have disappointed investors and as on 15 May 2015, as many as 35 PSUs (of the 76) are trading below their trading price a year ago, as on 16 May 2014.
Before the government came in to power, the positive sentiments were so strong that out of the 76 PSUs on our list, as many as 69 were trading higher on 16 May 2014 as compared to 1 January 2014 – as were many other large companies. Out of the 76, 47 PSUs hit their 52-week high on 16 May 2015. Most of the others peaked in the following 30 days. It was a few months later when investors realised the government’s priorities were different and they started looking elsewhere for opportunities. As many as 49 stocks are trading below their peak, which was hit nearly a year back.
While the government is entitled to decide how to prioritize its actions, the stock market was in no mood to wait for it to act on PSUs. The shares of PSUs started drifting down. Indeed, not only has there been no talk of reforming the PSUs but Public Sector Banks (PSBs) have continued to report bigger bad loans or non-performing assets (NPAs) and several of them are still headless. PSBs are under no pressure from the Ministry of Finance and Reserve Bank of India (RBI) to act against defaulting promoters. This was probably because the government depended on them for a successful rollout of opening 75 million new accounts under Jan Dhan Yojana and other subsequent savings and insurance schemes.
The first blow to market expectations was a tax-and-spend Budget in July, which included an ambitious programme to disinvest shares of select PSUs. Then soon after, the government unveiled a different set of priorities, launching Clean India and Make in India campaigns. Investors soon suspected that PSUs would be used as instruments of social change, not to create wealth. Hence, over the past six months most PSU stocks have fallen.
Among the 30 mega-cap PSUs, just 16 are trading in the black compared to their price a year ago. Bharat Electronics (123%), Gujarat Gas (118%), Central Bank of India (77%), Container Corporation of India (66%) and Hindustan Petroleum Corporation (45%) were the top five gainers. At the bottom of the list of mega-cap PSUs were Oil India (-16%), NMDC (-18.44%), ONGC (-19%), Punjab National Bank (-21%) and Bank of India (-27%).
Looking at the sector wise performance, banks were among the worst performing over the past year. Banks were hit due to their poor governance, rising bad loans and lack of monitoring by the finance ministry. Government-owned banks command a market share of around 70%. Most of these banks are reporting a low credit growth and slippages in their non-performing assets (NPA) levels.
The 25 public sector banks (PSBs) on our list declined by an average of 7.48% over the past year. In comparison, the Bank Nifty index is up 18.69% over this period. Just seven of the 25 PSBs are trading higher compared to a year ago. As many as eight banks declined more than 20% over the year as on 13 May 2015.
Among the banks, which gained the most over the year were Central Bank of India (76.73%), State Bank of Bikaner & Jaipur (45.08%), State Bank of India (13.48%), State Bank of Mysore (12.65%) and State Bank of Travancore (10.93%). The worst performers were United Bank of India (-32.76%), Oriental Bank of Commerce (-35.53%), Indian Overseas Bank (-38.46%), Uco Bank (-39.63%) and Jammu & Kashmir Bank (-43.06%).