PSUs running hot on the Street push up m-cap share to 13%

Mumbai: The share of public sector companies in India’s total stock market capitalization has surged to 13% from 10% in early 2022, thanks to the blistering rally in state-owned companies, according to an analysis by Motilal Oswal Financial Services. Though their pie of the country’s market value is still almost half of the 28% it commanded in FY12, analysts expect the gap to shrink in the near future.

India’s market cap stood at Rs 281 lakh crore on Thursday as against Rs 58 lakh crore in FY12. PSUs’ market cap increased to Rs 37 lakh crore from Rs 16 lakh crore in FY12, while the private sector market cap rose to Rs 252 lakh crore from Rs 41 lakh crore, said a report by Motilal Oswal Financial Services.

“A large part of the FY12-22 decade was spent cleaning up the balance sheets of financials, which took its toll on the overall PSU profits as PSU Banks formed one-third of the profit pool of Indian PSUs,” said Gautam Duggad, head of research, Motilal Oswal Financial Services. “The government’s emphasis on localization and make-in-India in the Defense sector has catalyzed the improvement in fortunes of industrial PSUs. Consequently, we expect this recovery in PSUs’ contribution to both – profits and market-cap – to sustain.”

The BSE PSU index surged 21% in 2022 compared to the 4.4% gains in the Sensex. PSUs such as Mazagon Dock Shipbuilders, Madras Fertilizers, UCO Bank, Bank of Baroda, Bharat Dynamics, Hindustan Aeronautics, Punjab & Sind Bank, Fertilizers & Chemicals Travancore, Indian Bank, Garden Reach Shipbuilders among other have rallied between 100% and 200% in 2022.

During FY12-17, overall PSU profits declined by 5% on a compounded basis, and the BSE PSU index returned 3.3%. Between FY17 and FY22, profits of these state-owned companies expanded 22% on a compounded basis while the BSE PSU index has remained flat. About half of these incremental profits came from PSU banks alone, while metals contributed 30%.

“Aggressive provisions on past high non-performing loans have cleaned up the balance sheet of the banks in a major way,” said Anusha Raheja, analyst Dalal & Broacha Stock Broking. “We expect strong profitability to continue going forward as well as driving their return ratios; hence, valuation re-rating is likely to continue as well.”