PSU stock rally pushes BSE500 Index from 11k to 24k levels

Listed public sector undertakings (PSUs) are reportedly contributing to the BSE 500 Index’s rally ever since the crash of March 2020. As per reports, the BSE500 which had hit lows of 11,100 in the wake of the first wave of the pandemic in March last year now stands at 24,000-levels, an over two-fold increase.

The BSE 500 Index consists of top 500 companies derived from the BSE All Cap, and is designed as a broad representation of the market, covering major industries.

The market capitalisation of PSUs that are part of the BSE500 universe over the last one and a half years has exceeded Rs 11 lakh crore, reports note. The market cap increase of some of the PSU stocks range anywhere between 25 per cent and 379 per cent, and the companies belong to sectors from coal, banking and financials, railways, energy and aeronautics, among others. Also, between January 2021 and September 30 this year, the BSE PSU Index saw its market cap rise by 43 per cent.

Govt thrust on privatisation

While the prevailing bullish sentiments in the market is one reason, the other reasons that may have contributed to the PSU rally include the government’s disinvestment plans.

As per the Union Budget of 2021-22, the government set a disinvestment target of Rs 1.75 lakh crore from the sale of stakes in public sector firms and financial institutions that include two PSU banks and an insurance firm. In the earlier Budget of FY20-21, the government’s disinvestment target was Rs 2.10 lakh crore but the pandemic reportedly affected the targets.

In August this year, the Department of Investment and Public Asset Management (DIPAM) had noted that the disinvestment of PSUs including BEML, Air India, BPCL Shipping Corpo of India, Pawan Hans, and Neelachal Ispat Nigam Ltd would be completed in the current year. As per reports, the government has thus far raised over Rs 8300 crore in the current year by the sale of a stake in some undertakings. The government’s greater focus on privatisation has attracted the interest of investors, leading to a rally in PSU stocks.

What’s more, the government earlier this year has permitted 100 per cent foreign direct investment in oil and gas PSUs that have been approved for strategic disinvestment.

Rise in global commodity prices

Another reason that has contributed to the PSU rally in the recent past has been the increase in commodity prices across the globe. Historically, the margins of PSU oil and gas corporations (upstream), for instance, are aligned with increase in price of crude. Oil is an important sectoral component when it comes to the PSUs in the BSE500 world, and upstream oil companies have been put at an advantage at a time when crude oil prices globally have been rising. Brent was at $82.47 per barrel on October 6 while WTI, the US crude benchmark, touched the highest level since 2014, on October 5, as per reports.

Also, commodity price increases, experts note, have aligned with PSU stocks delivering strong performances. As per data from the International Monetary Fund (IMF) on global commodity prices till August, the price of coal and natural gas have been at an all time peak ever since the 2008 financial crisis. On the metal and chemical fronts too, global prices have risen. As per the World Bank Commodities Price Data, the September 2021 average price of aluminium was at $2,835/metric tons when compared to the $2,645/metric tons in July 2021 and $2603/metric tons in August 2021, showing a month-on-month increase. PSU market shares in sectors including coal, power transmission and oil exploration are at 83, 40 and 75 per cent, respectively.

Attractive valuations

Further, PSU stocks have valuations that are attractive to investors when compared to other high valuation stocks. Excluding financials, many PSU stocks as per analysts have been trading at discounts to the NSE Nifty. This may have been another reason, experts note, that PSU stocks have been seeing a rally.

Conclusion

PSU stocks have contributed significantly to the BSE500 Index rally, which now stands at the 24,000 levels, more than a two-time increase from the 11,100 levels the index had touched during the market crash of March 2020.

FAQs

What is the BSE500 Index?

The BSE500 Index consists of top 500 companies derived from the BSE All Cap, and is designed as a broad representation of the market.

What has been the increase in market cap of PSU firms in the BSE500 in 18 months?

The overall market cap of PSU firms in the BSE500 world has been over Rs 11 lakh crore.

What is India’s disinvestment target for FY 21-22?

India’s disinvestment target for the fiscal year 2021-22 is at Rs 1.75 lakh crore.