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Government gains PSU muscle as stocks climb peaks

The surge in the Public Sector Undertaking (PSU) stocks has been a significant highlight in India’s financial markets recently. This rally has boosted the market capitalization of these government-owned entities and has also reinforced state ownership in listed firms to a seven-year high. The comeback of PSU stocks is proof of the transforming dynamics of government policies and market perceptions towards these entities. 

Overview of Recent Surge in PSU Stock Values and Historical Context

The PSU stock rally has been in the limelight as investors and market analysts are always paying attention to it. In the last year, PSU stocks have seen an incredible boost in their values which was driven by a combination of favourable government policies, robust dividend yields as well and market speculation regarding privatization. The Nifty PSE index which tracks the performance of state-owned enterprises, has reached new heights, reflecting the growing investor confidence in these stocks.

As for the historical context, the market capitalization of PSUs has seen various peaks and troughs over the years.

Peak in June 2009 and Low in September 2020

The first significant peak of 22% in PSU market capitalization was observed in June 2009. This period marked a time of robust economic growth and increased investor interest in state-owned enterprises. The government's focus on infrastructure development and economic reforms played a crucial role in driving PSU stock prices higher. 

The market capitalization of PSUs hit a low of 5.1% in September 2020. This decline was attributed to several factors, including policy inertia, inefficiencies in PSU operations, and increasing competition from private sector companies. Additionally, the economic slowdown caused by the COVID-19 pandemic further exacerbated the decline in PSU stock values.

PSU stocks

Reasons for the decline between 2010 and 2019

The market capitalization of listed state-owned companies increased by around ₹43 lakh crore to ₹61.22 lakh crore in the three years that concluded on March 31. In actuality, at this time, six new listings—including those of Life Insurance Corp. of India (LIC) and Indian Renewable Energy Development Agency (IREDA)—added roughly ₹6.4 lakh crore.

Nifty has returned 142% over the past three years, while the Nifty PSE and Nifty PSU Bank indexes have experienced notable increases of 326% and 493%, respectively.

Between 2010 and 2019, PSU stocks faced a challenging period. Several factors contributed to this decline:

During this period, there was a perception of policy paralysis, with delayed decision-making and implementation of reforms affecting the performance of PSUs.

Many PSUs were plagued by operational inefficiencies, high employee costs, and outdated technologies, which hindered their competitiveness.

The rise of private sector companies, particularly in sectors like telecommunications, aviation, and banking, posed significant challenges to PSUs.

Frequent regulatory changes and lack of clarity on policies affected investor confidence in PSUs.

Current Trends and Causes of Surge

PSU stock prices are currently rising for several reasons.  Policies and Reforms of the Government To improve the functioning and management of PSUs, the Indian government has implemented several reforms. 

Among these are:  

The drive for indigenization in the defence industry has given defence PSUs a big boost. Government backing and a growth in orders have helped companies like Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL). 

The government's initiatives for strategic divestment have improved public perception of PSUs. The government has shown that it is committed to lowering its holding in non-strategic industries with the privatisation of Air India and the upcoming disinvestment of BPCL. 

Enhancing transparency and appointing independent directors are two examples of actions to improve corporate governance.

High Dividend Yields and Record Cash Flows

PSUs are known to have high dividend yields which make them attractive to income-focused investors. Many state-owned companies have reported record cash flows, which have helped them to pay out substantial dividends. This has also furthermore boosted investor confidence in PSU stocks. 

The highest PSU stocks with the highest dividend yields in the last 12 months-

  1. Payout Masters: 4 to 5%

  2. Balmer Lawrie Investment: 4%

  3. ONGC: 4%

  4. Central Bank of India: 4%

  5. BPCL: 4%

  6. Power Grid Corporation of India: 4%

  7. Indian Oil: 5%

  8. Coal India: 5%

News of possible privatization

As the government declared the policy of maintaining control over one or more PSUs in the industry, Kotak Institutional Equities noted in their recent note that it is ruling out the privatization of the majority of the larger PSUs.  A few industries were designated as strategic for reasons related to key infrastructure, energy security, national security, etc. by the government in its February 2021 New Public Sector Enterprise Policy. These four broad areas included power, coal, petroleum, and other minerals; banking, insurance, and financial services; space and defence; and atomic energy, transportation, and communication.

Dalal Street’s positive attitude regarding the privatization of PSUs is considered unfounded. This is because of the concerns related to policy, implementation, as well as valuation. Concerns arise from the government’s stated privatization policy, previous challenges in privatization attempts and the high valuations of PSUs. These elements warn against the judgment of privatization as a sound investment strategy for PSUs.

"We note severe practical challenges that have stymied and may stymie the government’s privatization efforts. The case of CCRI is noteworthy, as the government had to rework several agreements between CCRI and the Indian

Railways to enable the privatization of CCRI, which is yet to take place despite being cleared for privatization in November 2019," it said.

It gave an example of BPCL that did not see much interest among potential bidders, given the sunset nature of the oil refining and marketing sector. "BPCL is a good example of the difference in approach to investment and ownership between strategic (long-term view of the sector) and financial (relatively short-term view) investors," it said.

When asked, KOtak expressed that they are not exactly sure if the privatization thesis for PSUs offers an ex-ante or post facto explanation for the recent high increase in PSU stock prices. It said that, given the government's declared policy in favour of PSUs, the practical difficulties encountered in the attempts to privatize BPCL and CCRI, and the high prices (inflated valuations) of the PSUs—many of which trade at a significant premium to their counterparts in the private sector, who are presumably the bidders for the PSUs—it was taken aback by the privatization argument.

"We note that valuations of most PSUs have expanded sharply over the past few months. The high valuations of the PSUs may reduce the interest of potential bidders even assuming that the government was keen to privatize some of the PSUs. Some of the possible candidates for privatization in the non-strategic sectors (metals, transportation) now trade at a large premium to their private sector peers," it said.

Significant Growth in Market Cap

The recent surge in PSU stocks has led to a substantial increase in their market capitalization. Several state-owned firms have seen their market values soar, adding significant wealth to the stock market.

Impact of New Listings

New listings such as the Life Insurance Corporation of India (LIC) and the Indian Renewable Energy Development Agency (IREDA) have also contributed to the growth in PSU market capitalization. These listings have attracted significant investor interest and have boosted the overall valuation of state-owned enterprises.

Performance Comparison

When compared to the broader market indices, PSU stocks have shown a matchless performance in recent times. The Nifty PSE index has displayed robust growth which reflected the positive sentiment towards PSUs. 

Nifty PSE Index Performance

The Nifty PSE Index which includes major state-owned enterprises has remarkably outperformed other market indices. This shows resilient investor confidence in the upcoming prospects of PSUs. In the last year, the Nifty PSE index provided significant returns increasing by more than 112% when compared to the 27% rise in the Nifty. Furthermore, in the year-to-date 2024, the Nifty PSE Index has gone up over 25% while the benchmark has seen a 4% increase.

Sectoral Performance

Assorted sectors within the PSU space have displayed varying degrees of performance. Defence, energy, and financial PSUs have been among the top performers which was fueled by favourable government policies and strong financials.

Significant Gains Over the Past Three Years

In the last three years, the investors on Dalal Street have secured significant rewards from the public sector enterprises (PSU). Out of all PSUs, Mazagon Dock Shipbuilders has done the best with regards to their performance with a shocking 999% increase since January in the year 2021. A boost of more than 500% was seen in the PSU sector by Rail Vikas Nigam, Indian Railway Finance Corporation, Hindustan Aeronautics, as well as Bharat Heavy Electricals among other noteworthy victors. On the other hand, the BSE PSU index experienced a significant increase of almost 200% throughout this period, whereas the benchmark BSE Sensex gained 55% between January 2021 and January 2024. Which industries will provide investors with a strong return over the next two to three years, and will the PSU pack's current momentum continue?

PSUs have gone from being one of the cheapest market categories to one where some of them appear overvalued in the last three years, according to Deputy CIO-Equity of ICICI Prudential AMC. “The phase of easy money in the PSU space is largely behind us. From here, one has to be more discerning about the PSU picks. At ICICI Prudential, we are positive on some of the PSUs within the power sector because not enough capacity is coming up in the power sector for the next two to three years,” Tawakley said.

Influence of Government Actions

The Government’s role in the resurgence of PSU stocks was noteworthy. Many policies and constructive decisions were made which influenced the performance and perception of Public Sector Undertakings (PSUs). These steps have offered a significant boost to the market capitalization of PSUs and have also instilled greater investor confidence in these entities. 

Government Policies and Reforms

High-profile privatizations, such as that of Air India, have set a precedent for future divestments. The ongoing discussions about privatizing Bharat Petroleum Corporation Limited (BPCL) and other state-owned entities have created positive market sentiment.

Significantly benefited defence PSUs like Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL). Increased government orders and a focus on self-reliance in defence have driven up the stock prices of these companies.

  • Corporate Governance Reforms: 

Appointment of independent directors, greater transparency in operations, and stricter adherence to corporate governance norms.

  • High Dividend Yields: 

Government policies encouraging PSUs to pay substantial dividends have provided steady income streams to investors, further boosting the attractiveness of these stocks.

  • Sector Specific Initiatives: 

Such as those in energy, infrastructure, and banking, have also played a crucial role.

As India continues to implement strategic reforms and pursue its divestment plans, the long-term success of PSUs will depend on sustained government support, efficient governance, and the ability of these enterprises to leverage emerging opportunities. The ongoing transformation of PSUs holds the potential to strengthen the Indian economy and enhance the competitiveness of state-owned enterprises in the global market.

Government Interventions Bolstering PSU Stocks

In recent years, government interventions have significantly influenced the process of bolstering the performance of Public Sector Undertakings (PSUs). Key interventions include:

  • Hiring Practices from Private Banks:

Hiring practices from private banks have been adopted by PSUs to enhance efficiency and management practices, aiming to improve operational agility and governance standards within the public sector. This shift is part of broader government reforms in PSUs to align with private sector best practices and enhance competitiveness.

Fresh capital infusion into PSU stocks has been instrumental in revitalizing their financial health and bolstering market confidence. This strategic move aims to enhance liquidity, support expansion initiatives, and strengthen their market position amidst economic uncertainties. It reflects ongoing efforts to optimize public sector unit market capitalization and ensure sustained growth in the Nifty PSE index.

PSUs have implemented robust recovery strategies to tackle defaulters, enhancing financial stability and investor confidence. These efforts are pivotal in optimizing public sector unit market capitalization and aligning with government reforms in PSUs, ensuring a resilient Nifty PSE index performance.

Challenges and corrections in PSU stocks involve navigating volatile market conditions, regulatory changes, and operational efficiency. Addressing these ensures sustainable growth in public sector unit market capitalization amidst ongoing government reforms in PSUs and fluctuations in the Nifty PSE index.

To conclude, the surge in PSU stocks has highlighted the changing dynamics of the Indian stock market and the increasing investor confidence in state-owned enterprises. This blend of favourable government policies, high dividend yields and speculation in the privatization has fueled the PSU stocks rally. The growth in market capitalization and state ownership displays an optimistic opinion towards these entities. The rally not only strengthens government finances but also boosts investor confidence, encouraging further reforms in the sector. With continued government support and strategic reforms, the future of PSU stocks and the broader Indian stock market appears bright.

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