Mumbai: Public sector companies have been underperforming the market big time. With the government stripping them of cash through high dividend and buybacks, investors are not willing to pay premium valuations for PSU stocks.
The government-owned companies like ONGC, Indian Oil, BPCL, Coal India have got de-rated in the recent past and are ruling at almost half their one-year forward price-earning (P/E) multiple compared to five years ago.
According to experts, investors are peeved by the fact that the government was taking out cash from almost all major PSUs in order to meet its revenue targets.
“Instead of going for strategic sale and divestment of government stake, PSUs are used for bailing out the government in times cash crunch. Investors are not willing to pay premium valuation to PSUs because of the way the government is using them as cash cows and straining them financially,” says Sumit Bilgaiyan, Founder, Equity99 Advisor.
An analysis shows that even as profits of central public sector enterprises have grown at a tardy pace of 2.2 per cent annually (CAGR) during FY 12-to-FY18 from Rs 1.15 lakh crore to Rs 1.28 lakh crore, dividend payouts have seen a 9 per cent Compound Annual Growth Rate, rising from Rs 49,700 crore to as much as Rs 76,500 crore.
The reason for the de-rating of these stocks, according to Kotak Securities, is “uncertain policies in certain sectors (such as automobile fuel pricing) and potential M&A between PSUs, which may have deterred investors from (buying) PSU stocks leading to large gaps between their fair values and stock prices.”
“We wonder if the government’s preferred mode of divestment through ETFs may have aggravated the problem,” Kotak Securities said.
The government may want to examine data on the type of buyers of PSU Exchange Traded Funds and the duration of their holdings of ETF units and review the 5 per cent discount in future ETF offerings, in case the buyers are largely institutional investors, it further said.
The government is also making these companies to go for buybacks, thereby reducing the companies’ ability to invest in capital expenditure. The government has shortlisted 11 CPSEs for buyback in 2018/19.
