PSUs face further investment apathy; privatisation may struggle: Analysts

The government’s decision to impose excise duty on crude oil may have another casualty – the sentiment across public sector (PSU) stocks, said analysts, who feel the move will dampen investment sentiment across this space. That apart, the government's plan to mobilize funds via the privatisation route may also feel the heat going ahead, they said.

“The increased earnings uncertainty of metal and oil & gas PSUs will hurt investment sentiment for PSU stocks further and also, potentially derail the government’s privatisation program. Many of the PSU companies are in sectors that face large disruption challenges and continued government ownership may further erode value,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities (KIE), in a recently co-authored note with Anindya Bhowmik and Sunita Baldawa.

The government’s decision to impose new taxes (for all practical purposes windfall taxes), Prasad wrote, may raise a fair degree of concern among investors about the overall investment climate in India. Given that the government had cut corporate tax rates in September 2019 to make India an attractive investment destination and promised large tax incentives under the PLI scheme to encourage domestic manufacturing, the recent step to tax windfall gains, KIE said, is contrary to the government’s overall investment-friendly attitude.

The bulk of the earnings reduction over the past two months for the Nifty-50 index, according to KIE, has come from the government’s decision to levy new taxes on the metals & mining (exports tax on steel) and oil, gas & consumable fuels (exports tax on diesel and gasoline and excise duty on crude oil) sectors.

“The new taxes are particularly deleterious since they are on revenues and thus, have a disproportionate impact on earnings. The stock prices of all steel and many oil & gas stocks have corrected sharply on the government’s move to impose new taxes. The Nifty-50 Index is down 3 per cent since the imposition of the exports tax on steel while the market capitalisation of the steel sector has fallen 21 per cent over the same period," Prasad said.

Thus far in fiscal 2022-23 (FY23), the Nifty PSU index has performed mostly in line with the frontline Nifty50. However, cuts in individual stocks have been sharper. NALCO, NMDC, SAIL, IRCTC, ONGC, HPCL, OIL India, Gail India and BPCL have slipped between 10 per cent and 43 per cent thus far in FY23, ACE Equity data show.

G Chokkalingam, founder and chief investment officer at Equinomics Research agrees and believes the windfall tax will make investors nervous as regards the PSU basket. “A lot of PSU stocks are already trading in single-digit price earnings (PE) multiples, and such a step will depress valuations further. The only silver lining is that these stocks are good dividend plays. Investors looking to play the market via this route can look at select stocks,” he said.

That said, some analysts believe the steps taken by the government are temporary and the measures will be reversed once the oil prices cool-off and inflation is brought under control. Devarsh Vakil, deputy head of retail research at HDFC Securities, for instance, believes the valuations of ONGC and SAIL are enticing enough for long-term investors to buy the stock.

“These measures are temporary. The government has imposed the tax to help cool inflation; and once that objective is achieved, the steps can be reversed. That said, the measures will dent sentiment across PSU stocks in the short-term,” he said.