MUMBAI May 16 Shares in India's unloved state
firms are soaring on hopes Narendra Modi, the country's next
prime minister, will push reforms to inject efficiency into
underperforming giants like Coal India.
Industries including banking, oil marketing and coal are
dominated by state firms, a legacy of the country's socialist
past. They tend to trade at deep discounts to private sector
rivals, but propelled by hopes for reform and an improving
economy, the index of state companies is up 37 percent
since the start of March, outperforming the 14.2 percent gain in
the broader Sensex. (link.reuters.com/wyg49v)
As Friday's vote-counting showed a resounding win for Modi's
opposition Bharatiya Janata Party, the state companies index was
up 3.6 percent, while the Sensex index was up 0.9 percent - even
though the state index trades at 10.4 times forward earnings,
compared with the 15.2 times forward price-to-earnings for the
As chief minister of Gujarat state, Modi was credited with
reforming bloated government firms such as Gujarat State
Fertilizers and Chemicals Corp and Gujarat Alkalies
and Chemicals Ltd.
Indian state firms, known as public sector undertakings or
PSUs, are often overstaffed and used to dole out jobs and other
"One of the things Mr Modi did after coming to power here as
chief minister is to get the politicians out of the boards of
the state PSUs," said Ram Mohan T.T., who teaches finance and
accounting at the Indian Institute of Management in Ahmedabad.
"They were in trouble partly because of the pronounced
political interference and he got rid of the politicians and
brought in professionals. If he can do that, that will be a big
move," he said.
PSUs are also vulnerable to industrial disputes and project
delays - as are many private sector firms.
Coal India, the world's biggest coal miner, often falls
short of output targets due to employee strikes, delays in
approvals to expand mines and India's inadequate railways.
"Outlook for PSUs should improve significantly, because of a
lot of operational improvements that could happen in government
companies," said S. Naren, chief investment officer at ICICI
Prudential Asset Management Co, whose biggest state holdings are
State Bank of India and Power Grid Corp.
Despite the current enthusiasm for PSUs in the market,
plenty of investors remain wary of state companies.
"I do not get the rally in state-run stocks. Most of them
have run up on valuations and (stake sale) hopes, which is not
sustainable," said Phani Sekhar, fund manager at Angel Broking.
Premal Madhavji, head of India equities at Espirito Santo
Securities, said the rally is driven by sentiment and that
operational improvements are unlikely for at least a year: "I
would not recommend a buy at this level on these stocks."
The financial sector in one area where change is expected.
Bad loans at state banks are far higher than in the private
sector. Modi is expected by some watchers to push for selling
down government stakes in state banks and reducing state
influence in their management.
An improving economic outlook under Modi would also help
restore the health of bank balance sheets.
Meanwhile, oil marketers Indian Oil Corp, Bharat
Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd
have borne the brunt of fuel subsidies that were a
hallmark of the outgoing Congress government.
"They (state firms) have been sub-optimally managed by the
government for many years, but Modi operates differently. He
will make them more accountable to public shareholders," said
Tarun Kataria, chairman of advisory firm Cityspring Management.
(Reporting by Sumeet Chatterjee and Tony Munroe; Additional
reporting by Abhishek Vishnoi and Himank Sharma; Editing by