CLSA bets heavily on PSUs post-Modi
When you look at the fact that, over 5 years, Gujarat’s listed PSUs have delivered a 15% annual return versus 16% for the Sensex, it is easy to understand why brokerage firm CLSA is so bullish on Central PSUs were a Narendra Modi to become the PM. The top six Gujarat PSUs have grown their net profits by a CAGR of 19% over the last 10 years—and we’re not even talking of the Gujarat Electricity Board which is profitable today after running losses of R2,246 crore in FY01. GSFC, which reported losses of R400 crore in FY03, now earns a 15% return on equity. GSPC, the holding company for a bunch of oil and gas businesses, now has a portfolio of 64 blocks including 11 international ones in Egypt, Yemen and Australia—had GSPC’s joint venture delivered on its promise of gas in the KG basin, the numbers would have been even more exciting.
Turning around Central PSUs, on the face of things, looks more difficult, if only because the sums involved are really large, and the budget really has no funds to spare. The PSU banks, to quote a recent estimate, need R5-8 lakh crore over the next 5 years, so there seems little option but to lowering the government stake in them; close to R10,000 crore has been infused as capital into Air India already and banks have restructured R10,500 crore of its loans while the airline looks no closer to a turnaround. More worrying, with very strong unions, most attempts at revival have failed —till recently, Air India and Indian Airlines’ merger was only in name and the pilots of the two airlines were in court over who would fly the Dreamliner. Which is why any attempt at getting a Modi to privatise has to be based on facts—what were the deliverables and can/have they been achieved? In the case of Air India, for instance, the Deloitte report had pointed out that the revival plan entailed the PSU’s market share rising from 17% in 2011 to 21% in 5 years, and assumed competing airlines—which are beating the pants off AI—will grow at 10% annually as compared to Air India’s 22%; in the international market, the plan assumes that while the overall market will grow by 8-9% annually, AI’s traffic will grow by 15% as compared to the competition’s 3-4%.
In several other cases though, with the promised autonomy, and reduction in subsidies, the turnaround is almost assured. The oil PSUs bore a R68,000 crore subsidy burden in FY14. At even their current PE ratios, writing this back to their bottomlines if subsidies are to be reduced—after reducing 30% as taxes—will raise their market cap by R5.25 lakh crore. Since the under-recoveries have also meant oil PSUs have lower multiples than their private counterparts, the increase in market cap will be even higher. If the Coal India problem is solved, more so if private mining is allowed, NTPC’s stocks will rise, as will those of power turbine manufacturer BHEL. Now to make it happen.