Apr 7, 2004|
PSU stocks: Is the interest over
While everybody is talking about the domestic benchmark indices and their performance in FY04, wherein they surged by about 83%, there is one sector index that managed to outperform the benchmark index by a huge margin. This is the BSE PSU index, which gained a whopping 148% in FY04. Further, if we increase the period under consideration to include FY02 and FY03 also, then the performance of the BSE PSU index is by far superior to that of the Sensex.
Just to put things in perspective, during the period FY01-FY04, while the Sensex gained 55%, the BSE PSU index gained nearly 6 times i.e. 308%! The surge in the PSU index was, of course, owing to the strength in the constituents of this index, which can be seen in the table above. Investors took fancy to PSU stocks primarily owing to the divestment moves by the government that had started to gather momentum during the period.
As can be seen in the chart above, the divestment programme gathered pace since FY02. Since then, there has also been an improvement in the financial performance of majority of the PSUs. While a part of this could be attributed to the increasing competition across sectors, which forced PSUs into a restructuring drive in order to survive, some of the efforts at improving performance could also be attributed to the fact that the government, which was increasingly looking at divestment receipts as an important source of revenue for the exchequer, would get better realisations for efficient organizations on parting with its stake.
FY04 saw the government garnering over Rs 150 bn, the largest divestment receipt in over a decade. And if the current indications are anything to go by, the story is not over yet. After the successful completion of the divestment programme in FY04, the government is now confident of achieving even more. The divestment story seems to have taken the drivers seat and now forms an important part of the government's economic reforms agenda. And why not?
|Back of the envelope calculation...
|Indian GDP size (US$ bn)
|Total deficit (Centre+State) (%)
|Total deficit (US$ bn)
|Probable yearly divestment receipts (US$ bn)
|% of GDP
|% of total deficit
If one considers our respectable divestment minister's view, which states that there is a potential to raise Rs 1,000 bn (US$ 22 bn) 'every year' from the equity markets, then it definitely acquires significance! This is because this US$ 22 bn forms nearly 4% of the current Indian GDP and nearly 40% of the current total deficit (Centre+state)! Now, kindly note here that this is just a hypothetical situation and there are many other issues, like the quality and the appetite for PSU equity that would be on offer, before something of this size could actually mature. However, though the above numbers seem large, it must be noted that till a few months back, even Rs 150 bn seemed large!
Further, it must be noted that if the government manages to take care of some of its fiscal deficit problems through divestment receipts, then it might lead to reduced borrowings from the markets, which could keep a check on any rise in interest rates owing to sufficient money available in the markets. Also, considering the speed at which most of the government's offerings were absorbed by investors (both retail and institutional) in the recently concluded divestment round and the improving scenario in terms of India's external debt, currency and investment ratings, the government seems to be on a fairly comfortable footing as far as a favourable environment for divestment is concerned.
Thus, to conclude, considering the government's performance on the divestment front in FY04 and the positive noises currently emanating from the Centre with regards to the continuation of the same, interest in PSUs could gather steam post elections when the government stance on the disinvestments process is made clearer. The interest in this index (PSU) may by no means be over.
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