PSUs Stand Tall Amid Its Private Sector Peers...

Tue, 19 Jul Pre-Open

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Public sector undertakings (PSUs) are in the news for all the wrong reasons in Indian stock markets. Inefficient management has dragged them to the epitome of wasted opportunities. If you track the performance of PSU companies, they have been heading only in one direction - southwards. Stocks of these PSUs have consistently underperformed the Sensex over long periods of time. And this has made market participants stand ten feet apart from them.

However, there is one sector in the PSU sphere that has stood tall as compared to the private players. An article in Livemint stated that PSUs in the power sector have outperformed their private sector peers. The returns offered by the PSU power companies has been consistent over the years. On the other hand, returns of private power companies have been volatile.

The study explained this, on basis of the return on equity (RoE) offered by power companies over the past few years. Going by the data, the average RoE for five PSUs power firms stood at 11% in the last fiscal. A similar calculation for nine private players stood at 4%. Three of the five PSUs generated double-digit RoE in each of the last five years. This was seen in none of the private firms, except <>JSW Energy.

In simpler terms, RoE communicates how well a business allocates its capital and generates returns on it. The higher the RoE, the better it is for investors.

The divergence in RoE above clearly shows us that PSUs in the power space have been generating better returns on their capital than the private players. And there's a reason to explain this divergence.

PSU utilities work mostly on the cost-plus model. They quote their price after incorporating a margin on the cost incurred. And this ensures them of a reasonable return. On the other hand, however, private utility firms work on a fixed tariff basis. By doing so, they are not able to pass on the increased variable cost to the end users and end up making losses.

So amid many value destroyers in the PSU space, power companies have bucked the trend.

The question now remains for other public sector companies. Will they depict the feat as power companies above? To answer this, we need to go back to the basics. And as far as the basics go, companies with sound fundamentals, robust management and attractive valuations should yield higher returns for shareholders in the long term.

Our latest Hidden Treasure recommendation is one such public sector company (subscription required).

As far as our views on the PSU firms go, we believe the challenges related to PSU firms are many. However, they are not insurmountable. We are no fans of the operational and management efficiency of PSUs. However, there still remain huge untapped value in some of these firms.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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