The Roman philosopher Seneca once said that luck is when preparation meets opportunity. The collective of daring and prescient investors who deployed their savings to invest in the shares of public sector enterprises are revelling at that intersection of fortune.
The timeline of data spells out the phenomenon eloquently. Consider this: in September 2020, the government offered the shares of Mazgaon Dock Shipbuilders at Rs 145 per share. The value of 100 shares bought at Rs 14,500 is now Rs 236,500. Fortune also favoured the brave who invested in Rail Vikas Nigam and in IRFC. For instance, 100 shares of RVNL bought at Rs 1,900 in the March 2019 IPO are worth Rs 32,000, and 100 shares of IRFC bought at Rs 2,600 at the IPO are worth Rs 17,600. The math of the returns on the investments is mind-boggling.
There is much noise about valuations and sustainability—about the lack of liquidity, the monopolistic status of the enterprises. All of which is worthy of attention. That said, the surge in PSU shares valuations between January 2023 and 2024 has left many wonderstruck. As per NSE data, IRFC gained 349 percent, Chennai Petroleum Corporation 322 percent, RVNL 257 percent, PFC 248 percent and IRCON 242 percent.
Indeed, while the benchmark Nifty50, which includes private sector companies, has posted a gain of around 76 percent, the shares of 25 PSEs, over a third of the universe of listed PSUs, have recorded gains of over 100 percent in market value. And the enterprises are from different sectors—from railways and capital goods to power and oil majors, and even government-owned banks nudging 52-week highs.
Interestingly, during a debate in parliament in August 2023, Prime Minister Narendra Modi, defending the economic policies of his government, quipped he had a guru mantra for stock market investors—to invest in shares of public sector enterprises. The remark presumably added to the momentum of investor interest.
It is not just Indians but also foreign portfolio investors who have queued up for PSU shares—the holding of FPIs in REC is at 20 percent, 18 percent in PFC and 17 percent in NTPC. The total market capitalisation of listed public sector units has shot up by over Rs 20 lakh crore in 12 months and was over Rs 52 lakh crore on Friday.
Money makes the mare go. New investors and domestic savings seeking returns propelled the rise in PSU shares. On average, over 1.5 million new demat accounts were opened in 2023, taking the total to 139 million and total assets under mutual funds grew from Rs 40 lakh crore to over Rs 50 lakh crore. Critical to the rise of the PSU stocks, though, has been the government spending on critical physical infrastructure, eye-catching push for green energy and what The Economist called an eye-wateringly big transport upgrade.
India added around 28 km of roads per day; the national highway network is now 1.46 lakh km. The railways are laying 15 km of lines per day—in 2023, India added 5,200 km of new tracks and in the past decade over 38,000 km of the broad gauge network has been electrified. In power, India added 97,501 MW in conventional and 96,282 MW in renewable generation in the past decade, taking the total generation to 425,536 MW. The expansion of power, roads and railways has fuelled orders and ramped up revenues of other PSUs who are contracted to supply equipment and components. The PSUs starring in the stock markets command dominance in the sectors and are beneficiaries of the spending drive to create capacity and connectivity.
A report by CRISIL points out that India spent Rs 67 lakh crore on infrastructure since 2017 and could spend as much as Rs 143 lakh crore in the next seven years. This is required to expand employment and growth. The question facing Budget 2024 and the medium-term future is how the spending will be funded. Rising government spend has implications for the cost of capital, incidence of taxation and private consumption. Growth driven by capital expenditure is governed by the statute of limitations on sustainability of borrowings for expenditure.
Budget 2023-24 estimated that this year the government would borrow about Rs 4,800 crore per day and pay around Rs 2,900 crore per day in interest costs. Over a fifth or 59 of the 248 operating PSUs are incurring losses of around Rs14,500 crore per year. Privatisation, which was mentioned in Budget 2021, is daunted by questions haunting the political economy. It is true that the pathways for growth—whether digital or physical—must be laid and paid for by government. Equally, how this is funded has implications.
Investor confidence in PSUs and the larger economy calls for trimming of the deficit and the cost of servicing debt. Government ownership ranges between 70 and 96 percent in many of the valued enterprises. The rise in PSU valuations represents an opportunity to recast the narrative of growth. The government could garner around Rs 4 lakh crore by diluting its holdings to between 51 and 74 percent, depending on strategic objectives. As it mulls its approach, it may well revisit the idea of creating a fund—a Bharat Investment Trust—to park its assets to be leveraged via disinvestments, privatisation and issue of exchange-traded funds for growth.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)