By IE&M Research
Many investors consider public sector companies as untouchables for obvious reasons. Mainly since the government’s holding is at a very high percentage. So the reason for their aversion is the popular belief about the unholy string attached with the government. Investors also have this perception that these companies underperform the broader market and fail to create wealth for them. And they also have one of the valid and unarguable reasons – that the management of these companies, though capable, does not have the required freedom to make rational decision creating long term wealth. Secondly, in many cases, their tenure is too short to implement a long term credible plan. And this is true many times. Therefore, PSU companies don’t get the required weightage in most of the portfolios.
The market capitalization of Central Public Sector Enterprises (CPSEs), companies where the direct holding of the Central Government or of other CPSEs is 51% or more, at the end of February 2019 stood at 9.41 per cent. Nonetheless, in many investors’ portfolios, the shares of PSU companies are much less. In recent years they have also been out of favour because they were under pressure due to selling-related worries. The government’s strategy of using the exchange-traded fund (ETF) route to divest its stake in them has led to some short-term technical pressure. Most of the investors buy them due to the discount being offered to them and after that, they sell in the market that creates oversupply and fall in the value.
Therefore, it is no surprise that BSE PSU Index comprising of 62 scrips including leading public sector banks has underperformed the frontline index, Sensex in last one year. Nonetheless, if we take data from the start of March 2015, we see that in many instances BSE PSU index has outperformed the frontline indices.
The current bout of underperformance by BSE PSU Index seems to be overdone now. If we assume it to follow ‘revision to mean’, we will see PSUs outperforming the broader market in the next few years. If we see the price correction in PSU stocks between 2015 and February 2019, we find that in many cases they do not follow their financial performance. Some of the PSU companies such as NALCO and OIL India have witnessed doubling of their profits between FY14 and FY18; however their share prices are quoting near their 52 week low.
There is a lot of value in many fundamentally strong PSU stocks now, given their recent price correction. Since the dividend yields of some of them are good, long-term investors can invest in them for regular dividends. The current high dividend yield of PSU index (2.86 per cent compared to 1.17 per cent for BSE Sensex) is because the government is trying to extract money from the PSUs in the form of high dividends in order to meet its fiscal deficit target. Though retail investors have also benefited from higher dividends payouts, dividends alone shouldn’t be the reason to invest in PSU stocks.
To make our reader’s task easier, we have created our own ‘PSU Navaratna’; stocks with good upside potential. We have tried to select these stocks from a diversified sector so that they can have a profitable PSU portfolio.
Coal India Ltd.
BSE Code/NSE: 533278/ COALINDIA
Promoter’s holding: 72.91%
Coal India Ltd. (CIL) is the largest coal producing company in the world. The company also produces non-coking coal and coking coal of various grades for diverse applications. The company’s customers include large thermal power generation companies, steel and cement producers and other industrial companies in the public and private sector.
CIL’s topline between the financial year 2014 and 2018 has increased by CAGR of 11 per cent. In the same period, its bottomline declined at a rate of 17 per cent annually. Nonetheless, the current results are quite encouraging and we have seen substantial improvement. Net sales of the company have increased by around 12 per cent on both sequential and yearly basis to Rs23385 crore for Q3FY19. Bottomline in the same period has seen a humongous jump of around 50 per cent and was at Rs4565 crore. The best part of the Company is its high dividend yield. At the current price the dividend yield comes at around 7.22 per cent, better than savings bank account rate of interest and some of the fixed deposit rates.
Gujarat Gas Ltd.
BSE Code/NSE: 539336/ GUJGAS
Promoter’s holding: 60.89%
Gujarat Gas Ltd., which was formerly known as Gujarat Gas Company is engaged in processing, transmission, and distribution of natural gas. It supplies gas to industrial, commercial and domestic customers. In the last five years ending FY18, the Company saw its topline declining by around 6 per cent annually, however, its profit increased by 10 times in the same period. In the third quarter of FY19, the Company has reported a good set of numbers on the profitability front. Revenue increased 34.8% YoY to Rs2171.4 crore. Total reported volumes increased 4.1% YoY and came in at 6.6 mmscmd vs. street estimate of 6.9 mmscmd. Volumes were below on account of lower sales volumes QoQ on the industrial PNG front. Realisations were, however, higher than the street estimates at Rs35.1/scm. Subsequently, PAT increased 130% YoY and came in at Rs138 crore. The Company has been rapidly expanding its reach in Gujarat by way of securing licences to expand its CGD network across five new areas, making it to a total of 20 districts of Gujarat, Dadra and Nagar Haveli, Thane and Palghar in Maharashtra. Also, lower costs will help Gujarat Gas maintain steady growth in profits.
National Aluminium Company
BSE Code/NSE: 532234/ NATIONALUM
Promoter’s holding: 56.77%
National Aluminium Company (Nalco) is Asia’s largest integrated aluminium complex, encompassing bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port operations. Company has exhibited good financial performance in the last few years. Between FY14 and FY18, its topline and bottomline have increased at 9% and 20% CAGR respectively. Despite such stellar financial performance, the share price of the Company is trading near to its 52 week low. In the third quarter of FY19, the Company saw its sales increase, however, its profit declined by more than 50%. Nonetheless, going ahead Company is likely to post better numbers. According to the media reports, the Company aims to raise its net profit to more than Rs2,000 crore by 2020 and Rs2,500 crore in the next three years using a new business model. When the global economy was reeling under economic slowdown, with the metal sector being affected the worst; NALCO took a conscious decision of introducing an all-weather business model that focuses on benchmarking and quantification, which is likely to yield better results going ahead.
Oil India Ltd.
BSE Code/NSE: 533106/ OIL
Promoter’s holding: 63.20%
Oil India Limited explores for, develops, and produces crude oil and natural gas in India and internationally. The Company operates through Crude Oil, Natural Gas, Liquefied Petroleum Gas (LPG), and Pipeline Transportation segments. It is also involved in the transportation of crude oil; and production of LPG, as well as in the provision of exploration and production related services. For Q3FY2019 the Company’s operating profit stood at Rs1,521 crore (up 24.3 per cent YoY; up 3.2 per cent QoQ), slightly above street estimate of Rs1,473 crore, owing to lower-than-expected other operating expenses (down 31 per cent QoQ on account of a decline in provisions and lower insurance, rent & sundry expenses) and higher-than-expected gas sales volume at 0.65bcm. However the benefit of the above was partially offset by lower-than-expected oil sales volume at 0.81mmt and lower than expected net oil realisation at $66.7/bbl (up 12.2 per cent YoY; down 9.2 per cent QoQ). Going ahead earnings are slated to increase owing to higher net oil realisation (as adequate fuel subsidy provision allays concern of subsidy sharing by upstream PSUs), lower operating expenses and lower effective tax rate.
Petronet LNG Ltd.
BSE Code/NSE: 532522/ PETRONET
Promoter’s holding: 50%
Petronet LNG (PLL) is one of the leading players in oil and natural gas industry space. It is promoted by GAIL (India), Oil & Natural Gas Corporation (ONGC), Indian Oil Corporation (IOCL) and Bharat Petroleum Corporation (BPCL). The company has entered into sale and purchase agreement (SPA) with Ras Laffan Liquefied Natural Gas Company, Qatar for the supply of LNG to India. The company has India’s first and largest LNG supply terminal located at Dahej. In the last five year ending FY18, although sales of the company have declined, profit has multiplied by 3 times. Going ahead, the company is likely to maintain the momentum. The reason being the Dahej capacity expansion is in progress and once fully commissioned along with the 5% annual hike in re-gas tariffs (w.e.f. January’19) will contribute to strong earnings performance. As for its Kochi terminal, it is expected that tariffs would soften post the Kochi-Mangalore pipeline comes on-stream. Nevertheless, the increased volumes will contribute to higher profitability. These are expected to be key triggers for PLNG in the coming quarters which improve PLNG’s business outlook and earnings visibility.
BSE Code/NSE: 533286/ MOIL
Promoter’s holding: 65.69%
MOIL, which was earlier known as Manganese re (India) Limited, is engaged in the exploration and marketing of manganese ore and products, such as electrolytic manganese dioxide and high carbon Ferro manganese alloy. The Company operates through three segments: mining, manufacturing and power generation. The Company operates approximately three opencast and over seven underground mines. The Company has total mining leases over an area of approximately 1,613.61 hectares land, out of which over 699.06 hectares land is in Maharashtra and approximately 914.54 hectares land is in Madhya Pradesh. In last four years ending FY18, the Company posted sales growth of 7% annually. In the same period, however, the profit declined by 6 per cent. Nevertheless in third quarter of FY19, the Company posted sales growth of 11 per cent on yearly basis while the profit in the same period declined by around 16 per cent. As prices of metals are firming up, the performance of the company is likely to keep on improving. With a dividend yield of almost 4 per cent and the Company trading near to its 52 week low, we believe it to be good buy for investors.
Steel Authority of India Ltd.
BSE Code/NSE: 500113/ SAIL
Promoter’s holding: 75%
Steel Authority of India (SAIL) is country’s largest state-owned iron ore producer. It is one of the leading steel-making companies in India. SAIL manufactures and sells a wide variety of steel products such as HR/CR sheets and coils, galvanised sheets, electrical sheets, structural, railway products, plates, bars and rods, stainless steel and other alloy steels. The performance of the company has not been very encouraging in last couple of years and the Company had even posted loss in FY18. Nonetheless, it is going to change now. The latest quarterly result stands testimony to that. Despite the recent fall in international steel prices around 20% during the past six months, SAIL reported strong Ebitda and net profit growth during the quarter because of improvement in operating efficiencies and leverage, and lower forex hedging losses. Ebitda stands for earnings before interest, tax, depreciation and amortisation. Growth in Ebitda per tonne for SAIL was also better than peers due to volume ramp up and the low base effect. Going ahead it is expected to turnaround in FY19, and report around 8% sales volume growth till 2019-20, given the smooth execution of its expansion plans.
GAIL (India) Ltd.
BSE Code/NSE: 532155/ GAIL
Promoter’s holding: 53.07%
GAIL (India) Ltd. is India’s flagship natural gas company integrating all aspects of the natural gas value chain including exploration and production, processing, transmission, distribution and marketing and related services. In last four years ending FY18, the Company has reported flat set of numbers both in the topline and bottomline, however, share price of the Company has witnessed a substantial fall and is trading within 10% of its 52 week low. The Company’s profit for the December-ended quarter beat estimates due to higher revenue from its natural gas marketing and liquefied petroleum gas business. Net profit increased by 33 per cent on yearly basis to Rs1,681 crore. That compares with the Rs1,578-crore consensus street estimates. Revenue rose 37.29 per cent to Rs19,789 crore yearly against the estimated Rs18,986 crore. Going ahead, the Company’s revenue is expected to grow at lower teens backed by swing in gas volume from HVJ (Hazira – Vijaypur -Jagdishpur) (low tariff) to DVPL (Dahej-Vijaipur pipeline) (higher tariff), as the Company will continue to swing in gas volume from HVJ to DVPL. Further the Petroleum and Natural Gas Regulatory Board (PNGRB) is likely to upwardly revise HVJ and DVPL tariff in next 6-8 months.
Oil & Natural Gas Corporation
BSE Code/NSE: 500312/ ONGC
Promoter’s holding: 65.64%
Oil & Natural Gas Corporation (ONGC) was originated in the year of 1956 as a private sector company. Later, in the year 1993 the company came under Public Sector. ONGC is the largest crude oil and natural gas Company in India, contributing around 70 per cent to Indian domestic production. Crude oil is the raw material used by downstream companies like IOC, BPCL, and HPCL to produce petroleum products like Petrol, Diesel, Kerosene, Naphtha, and Cooking Gas-LPG. The fall in the crude oil price since 2014 has impacted its financial performance in last few years; however the recent surge in prices has again put the Company in strong footing. In the quarter ended December 2018, the Company posted a 64.8 per cent jump in third-quarter profit, boosted by higher revenue from offshore operations. Its profit increased sharply to Rs8,263 crore in the quarter ended December 2018, from Rs5,015 crore a year earlier and revenue from operations climbed over 20 percent to Rs27,694 crore, while revenue from offshore operations rose 19.1 per cent. As explained earlier adequate fuel subsidy provision allays concern of subsidy sharing by upstream PSUs, the Company is well placed to perform better going ahead.