A Transformation Story of PSU Stocks in India

Traditionally viewed as inefficient and bureaucratic, PSUs in India are undergoing a significant transformation, leading to improved financial performance and a surge in their stock prices.

For many years, Indian PSUs were synonymous with sluggish growth and inefficiency. However, the narrative is changing. In a significant development, PSU stocks have been outperforming India’s benchmark stock index, the S&P BSE Sensex, for the past four years. This trend continued in 2024, with the S&P BSE PSU Index, which tracks the performance of the public-sector undertakings, surging multifold during Prime Minister Narendra Modi’s second term that began in mid-2019. This impressive gain dwarfs the Sensex’s return over the same period

Comparing the past year’s returns of the S&P BSE PSU Index and the S&P BSE Sensex Index reveals the remarkable outperformance of state-run firms in India’s evolving market landscape

Additionally, companies like NTPC and Coal India have witnessed significant improvements in sales per employee, indicating better operational efficiency.

Corporate Governance Reforms Drive the Change

The turnaround in PSU fortunes can be attributed in part to a series of corporate governance reforms implemented by the Current government. These reforms have focused on increased transparency, improved decision-making processes, and a greater emphasis on shareholder returns. For instance, the government has pushed PSUs to boost capital spending, pay higher dividends, and conduct regular meetings with investors and analysts. Some firms have even linked top management compensation to company performance, mirroring practices commonly followed by private companies.

These measures seem to be paying off. NTPC, India’s largest power generator, has seen a significant improvement in its metrics following a revamp of hiring and promotion processes. Similarly, Coal India, the country’s top coal producer, is in the final stages of closing hundreds of unprofitable mines, leading to a sharper focus on viable operations. The positive impact of these reforms is evident in the financial performance of PSUs . Companies like NTPC and Coal India have seen their share prices more than double in the past three years. This trend extends to other PSUs like State Bank of India (SBI), the country’s largest lender by assets, hydropower generator NHPC Ltd., and railway equipment maker BEML Ltd., all of which are focusing on cost-cutting and operational improvements.

Skepticism and the Road Ahead

Despite the positive developments, one must always remain cautious. The rally in PSU stocks might not be sustainable, citing potential slowdowns in earnings growth. Additionally, concerns linger regarding the long-term viability of some PSUs , particularly those in non-growth sectors. However, signs such as increased FII holdings point to a visible “change in mindset” within the government and its effects on the shareholders, with a focus on creating long-term value in PSUs rather than short-term gains. This optimism is reflected in the success of PSU-focused funds launched in recent years

The table showcasing the top 5 PSU companies with the highest change in FII holdings over the past 3 years underscores the growing confidence of foreign investors in India’s state-owned enterprises.

Stocks of India PSUs Set to Beat Benchmark for Fourth Year

Looking ahead, several factors will influence the future trajectory of PSUs in India. The upcoming general elections and the potential return of Prime Minister Modi are crucial, as policy continuity is seen as essential for sustained reforms. Additionally, progress on issues like increasing public shareholding in PSUs and attracting more foreign investment will be keenly watched by investors.

Conclusion

The recent transformation of Indian PSUs presents a compelling story for investors. Backed by government reforms and a focus on operational efficiency, these companies are delivering improved financial performance and attracting greater investor interest. While some uncertainties remain, the overall outlook for PSUs appears promising, with the potential to play a significant role in India’s economic growth story.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.