IGI Logo

Indian PSUs – scripting a comeback story

Profits triple over FY20-22 after flattish FY12-20; PSU Banks lead the charge

* PSUs – a force to reckon with! Indian PSUs have undergone a topsy-turvy journey in the last decade despite being formidable franchises with dominant market shares of 60%-80% in Oil & Gas (O&G), Financials, Utilities, Mining and Heavy Engineering.

* After years of underperformance, PSU Index has outperformed Nifty in CY22. In this report, we analyze Indian PSUs’ journey over the past decade as well as their future prospects. For our analysis, we have used all the listed PSUs.

Key insights from the report

* Most of the Indian PSUs are present in deep cyclical industries (Metals, O&G, and Financials) and thus have inherently volatile and cyclical profitability/ market-cap performance. A large part of the FY12-22 decade was spent in cleaning up the balance sheets of Financials, which took its toll on the overall PSU profits as PSU Banks formed one-third of the profit pool of Indian PSUs. This coupled with several other macro disruptions kept the PSU profit pool suppressed over FY12-20.

* The PSU story is essentially of two halves: a) during the first half (FY12-17), profitability and market-cap performances were extremely tepid with overall PSU profits declining at 5% CAGR and BSE PSU index generating returns at 3.3% CAGR; and b) over the second half (FY17-22), PSU profits expanded at 22% CAGR while BSE PSU index remained flat. Subsequently, PSU Index rose 17% postApr’22. In fact, PSU profits declined at 4% CAGR even over FY12-20 and BSE PSU Index was 8% lower as of FY21 than in FY12.

* The second half performance was fueled by a sharp 3x improvement in PSU profits to reach INR3.3t from INR1.1t over FY20-22. About half of these incremental profits came from PSU Banks alone while Metals contributed 30%. Profits of PSU Banks surged 12x to reach INR1.2t in FY22 (more than the sum of cumulative profits over FY15-21) from INR97b in FY20. The ROE of Indian PSUs improved significantly to 14.4% in FY22 from 6.6% in FY16 and is well within the reach of breaching 15% in FY23, the first time since FY12.

* PSUs’ share in India’s market-cap dropped notably to 10% in FY22 from 28% in FY12 but is now recovering and currently stands at 13%. Over similar period, India’s market-cap multiplied to INR265t in FY22 from INR58t in FY12 and it currently stands at INR289t. During FY12-22, PSUs’ market-cap moved up to INR27t (INR37t as of Dec’22) from INR16t while private sector market-cap rose to INR238t (INR252t as of Dec’22) from INR41t.

* As we look ahead, the profitability of PSUs is shooting up across domestic as well as global cyclicals with turnaround in the fortunes of PSU Banks driving the overall trend. Higher commodity prices over the past two years have aided the P&L and balance sheets of Metals/O&G PSUs. The government’s emphasis on localization and make-in-India in Defense sector has catalyzed the improvement in fortunes of Industrial PSUs. Consequently, we expect this recovery in PSUs’ contribution to both – profits and market-cap – to sustain.

Undergoing smart resurrection; loss pools peter out

* PSUs’ performance has deteriorated over the last five years. During FY17-22, the BSE PSU Index (flat) underperformed Nifty (13.7% growth). However, the profits of PSUs (at 22.5% CAGR) outperformed that of Private Sector (at 14.5% CAGR) over the same period. The share of PSUs’ in the profit pool expanded to 31% in FY22 after hovering in the range of 17-30% during the past few years. ? For FY23YTD, the PSU Index return (+17.5%) has outperformed the benchmark (+ 5.3%) handsomely.

* Loss pools of PSUs have reduced consistently over the last five years: The contribution of loss-making companies has dwindled over the past few years, which is currently at 1% of profit pool v/s 47% in FY18.

Decoding the decade: Analyzing the profit pool of PSU’s over 2012-22

* After a muted performance over FY12-20, when the Listed Universe earnings CAGR stood at 2% and absolute profits expanded to INR4.6t in FY20 (v/s INR3.9t in FY12), corporate earnings have accelerated and posted a 51% CAGR over FY20-22 to reach INR10.5t in FY22 from INR4.6t in FY20.

* Notably, the Listed PSU Universe reported a 3.7% decline over FY12-20 and its profits contracted to INR1.1t in FY20 from INR1.5t in FY12. However, the PSUs have posted a strong 70% profit CAGR over FY20-22 to reach INR3.3t in FY22 v/s Private Sector Universe CAGR of 44% over the same period reaching INR7.2t in FY22.

* BFSI’s contribution to PSU profit pool has been quite stable at ~35% over the last couple of years; whereas, O&G’s contribution has plunged to 35% in FY22 from 93% in FY18. Further, Utilities’ share has dipped to a new low of 17% in FY22.

* We note that there were two distinct growth phases: a) Phase 1 (FY12-17), which clocked a muted PAT CAGR and Phase 2 (FY17-22), which posted a higher PAT CAGR

The two distinct phases of growth

Phase 1 (2012-17): Period of slowdown…

* During this five-year period, corporate profits grew at a slower pace due to multiple macroeconomic headwinds and high interest rates.

* Listed Universe profit registered a 4.4% CAGR during Phase 1, primarily fueled by Technology and O&G sectors.

* PSU Universe profit declined 4.9% during Phase 1 led by BFSI, Metals, and Capital Goods sectors. BFSI’s profit recorded a 29% decline led by asset quality clean-up and its share in the PSU profit pool slipped to 7% in FY17 from 31% in FY12.

* Further, Metals weakened notably due to supply-side issues, weak underlying commodity prices and mining bans during the period. Its contribution in Listed PSU profit pool dipped markedly to 1% in FY17 from 9% in FY12.

* Notably, O&G and Utilities’ contributions to PSU profit pool increased to 55% and 31%, in FY17 from 32% and 22% in FY12, respectively.

Phase 2 (2017-22): …on a recovery mode

* During this period, corporate profit growth across sectors bounced back smartly propelled by tax rate cuts, reduction in the banking sector NPAs and postpandemic tailwinds, after a weak two-year base.

* Listed Universe profit posted a stronger 16.7% CAGR in Phase 2 to reach INR10.5t.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer