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What drives PSU valuations? - Views on News from Equitymaster
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  • Feb 20, 2001

    What drives PSU valuations?

    It is no secret that the Indian markets have rediscovered the old economy stocks. In particular, the public sector undertakings (PSUs) have been on a steady upswing in the past few months. But even among these gainers, some have gained more than the others. For example, India’s No. 1 engineering company, Bharat Heavy Electricals (Bhel) and refining major Bharat Petroleum (BPCL), both have been among the prominent gainers during the last six months.

    Bhel has gained a significant 42% since August 2000. But BPCL‘s gains are even higher at 125%. The reason for clubbing these widely contrasting companies’ price performance together is to understand why the markets did what they did?

    Although both Bhel and BPCL are Public Sector Undertakings (PSUs) and are among the disinvestment probables, the sharp difference in their rise indicates that the markets have not given a blanket re-rating to stocks.

    Though the old economy stocks on the whole have gained, some of them have really zoomed on the bourses. In the case of BPCL and Bhel, one reason is the fact that Bhel reported a whopping Rs 1.8 bn loss in the first nine months of FY01. Comparatively, BPCL earned a net profit of Rs 6.6 bn (up 20% YoY) during the same period. Going by this fact alone, BPCL has a better chance of continuing to improve its valuations, as compared to Bhel. But one has to look at sector specifications.

    9m FY01 (Rs m) Bhel BPCL
    Sales 35,865 333,442
    Operating margins -0.80% 3.40%
    NPM -5.10% 2.00%
    Annualised EPS (Rs) -10 28
    P/e (X) - 7.1
    Return on equity (%) (FY00) 19.3 20.9

    Apart from the long shot hope of disinvestment, BPCL also has the added upside in the form of a dismantled APM (Administered Price Mechanism) post April 2002. It is also expected that the refining margins could improve with oil prices declining. In contrast, Bhel is dependent on investments in the power sector, which are under a cloud following the recent Enron controversy. The company has the distinction of supplying generating equipment for 65% of India's total generating capacity. But this has largely been due to the fact that the National Thermal Power Corporation (NTPC) sources almost 85% of its requirements from Bhel. The reason why Bhel has appreciated even 45% is the fact that it is expected to recoup a major portion of its losses in the 4QFY01.

    Bottomline, the bourses are taking keen interest in the PSUs. But disinvestment is not the only factor market movers are looking at. The ground realities regarding the business profile and the profitability statements matter too.



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