The unsung heroes

Disinvestment will raise the free floating stock of PSUs, which will increase their weightage in key indices, thereby drawing greater investor interest.

PSUs are the unsung wealth generators of the Indian stock market. In the 10 years till 26 February 2010, the BSE PSU Index has given annualised returns of 22.8 per cent compared with 12.6 per cent delivered by the Sensex during the same period. This outperformance is due to the strong fundamentals of these companies; most PSUs are leaders in their respective industries and, in many cases, have a virtual monopoly in the business. In addition to certain unique advantages that these companies have due to historical reasons, they have healthy balance sheets and high capital return ratios. This makes them one of the key actors in India's growth story.

The current government has espoused a policy of reducing its stake in the listed PSUs and listing its profitable (as yet unlisted) entities. The government's compulsions for pursuing disinvestment are wellknown. We believe it is an appropriate response given the twin challenges of raising resources and reducing pressure on the bond markets. In doing so, it provides investors the opportunity to participate in the growth of these strong businesses, and this opportunity is worth taking.

On an aggregate basis, PSU companies account for over 30 per cent of the total market cap of all companies listed in India. However, due to their limited free float they are underrepresented in all key indices. In the Nifty, the weightage of PSU shares is about 14 per cent, even though their weightage on a full market capitalisation basis would be nearly 28 per cent. Consider this: private sector engineering giant L&T has a market capitalisation of Rs 95,000 crore and reported an adjusted profit of a little under Rs 3,000 crore, while Bhel has a market cap of Rs 1,20,000 crore and reported a profit of slightly over Rs 3,000 crore. However, L&T's weightage in the Nifty is 6.36 per cent, whereas Bhel's is 2.6 per cent. As the government divests more of its equity in PSUs, free float would go up in the companies, as would their weightage in benchmark indices, thereby drawing more investors.

There is also a significant amount of wealth waiting to be unlocked in unlisted PSUs. Companies such as BSNL, Coal India, Life Insurance Corporation and New India Assurance are large, dominant and unique. Their stocks would be wellreceived by investors and would add diversity to the market.

The one risk that most analysts associate with PSU companies is obviously that of government interference. But listing the company brings with it the added pressure of corporate governance and public scrutiny, which would be positive for the PSUs.

No doubt the policy limbo in sectors such as oil and fertilisers affects the PSUs operating in these sectors, but keep in mind that such policies affect the private sector as well. In the end, this risk has to be viewed in the context of their strong business fundamentals and financials.

The steady offerings of PSUs will raise their profile and their sound fundamentals will attract more investors as their free float goes up. For investors, this presents an attractive opportunity. This is not to suggest that all PSU firms are attractive at any price. But at the right price (in an IPO or an NFO) or in the secondary market, this is an investment theme that merits an allocation.

- Vetri Subramaniam is Head of Equity Funds, Religare Mutual Fund