Government's strong privatisation pitch to boost PSU stocks; SBI, NTPC, GAIL in focus

The Prime Minister's statement "the government has no business to be in business" was hailed by India Inc. Industry leaders and analysts believe privatisation, barring strategic sectors, would offer plenty of exciting opportunities, boost investments and create jobs.

"There are a large number of public sector enterprises, which have been consistent in delivering positive cash flows and rewarding investors with strong dividend payouts. However, concerns related to government interferences especially related to capital allocations have been the prime reasons for valuation de-rating over the years. We believe privatization of PSU will enable companies to improve profitability further," said Binod Modi, Head Strategy at Reliance Securities.

PSU stocks are likely to remain in focus in the coming fiscal as possible privatisation or monetisation of PSUs will likely result in valuation rerating in this space.

Analysts expect privatisation to be a strong step in boosting the economic growth of the country.

"This can prove to be a very strong step taken by the government for improving the overall economy of the country," said Nitin Shahi, Executive Director of FINDOC, a financial services group.

Shahi believes privatisation will foster change in management style as they are running on an unchanged set of rules for the past so many years.

"Government, too, has limitations while making any profitable decisions. Private investors would be able to overcome these problems and the new management would be much more inclined towards making the company profitable which in turn will increase the overall efficiency of the corporation," said Shahi.

"More employment would be generated due to an increase in efficiency. There will be more work for everyone which would create a positive impact in boosting the national income of the country in the long-run," he said.

Vijay Bhambwani, Senior Research Analyst, Equitymaster is of the view that the PSU privatization will unlock funds for the government and make the companies themselves more efficient and lean which in turn will enhance shareholder value as most of these stocks are trading at a relative discount to their private-sector peers.

"If implemented well, this will prove to be a win-win situation for all stakeholders concerned. A similar approach was tried by British PM Margaret Thatcher Who also felt running businesses was best left to businessmen. It revived the British economy," Bhambwani pointed out.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities highlighted PSU stocks as universe offers both deep value and high dividend yield.

"They have been quite neglected by investors on account of the regular supply of paper and lack of visibility. Growth and clarity on execution is a key concern in many PSU stocks which needs to be addressed. This time the government has made its intention clear by stating that it would like to retain only a handful of PSUs in four key strategic areas" said Oza.

Oza said in the last 10 years, the BSE PSU index has peaked at 12-13 times on forward PE basis which shows there is enough headroom for re-rating if things move in the right direction.

"BPCL strategic divestment and privatisation of two PSU banks could be the inflection point for further re-rating in PSU stocks. The dividend yield of the BSE PSU index works to about 3.5 percent which provides a good margin of safety in today’s market. There are many large-cap PSU stocks having good RoE, cheap valuations and high dividend yield," said Oza.

Stocks to buy

Oza of Kotak Securities has a buy call on SBI (target price: Rs 450), NTPC (target price: Rs 125), GAIL (target price: Rs 160), Coal India (target price: Rs 185) and BPCL (target price: Rs 475).

Shahi of FINDOC underscored stocks like Bharat Electronics, BEML, RCF, UCO Bank, IOB that are not performing well will definitely from this decision.

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