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Tortoise Marches Ahead

PSU stocks, after a prolonged identity crisis, have finally emerged winners in the current market downturn

The proverbial tortoise versus rabbit story had given birth to probably the most widely used moral: slow and steady wins the race. Well, we would like to use it once again. This time, the tortoise we are talking about are the Public Sector Undertakings (PSU).

After having suffered a prolonged period of identity crisis, PSU stocks have emerged as the widely preferred choice. And why not? After all, PSU stocks have outperformed their counterpart private companies. A comparison of the returns generated by BSE Sensex and BSE PSU Index is a corroboration of this fact. In 2007, the former gave returns of 47.14 per cent, which was outdone by the latter by giving returns of 73.49 per cent. Even in the turmoil of 2008, BSE PSU Index fell lesser than BSE Sensex. Furthermore, a similar gap in returns is seen between BSE Bankex and S&P CNX PSU Bank Index.

The advantages of investing in PSUs are manifold. Especially, after the Satyam scandal, government-backed companies are considered to be trustworthy. Moreover, PSUs are abided by a special arrangement for audit by the Comptroller and Auditor General of India, which further instils confidence in the minds of investors.

If we go back in history, PSU companies, especially the giant ones, have been able to display steady performances. This trend is not visible in their private sector counterparts, who in the hurry to expand their businesses take aggressive bets, especially with borrowed money. Because of this they are currently stuck in a debt trap. The slow and steady approach of the PSUs has come as an opportunity in disguise for them in the global slowdown.

To prove this point, we've looked at y-o-y growth in PAT (profit after tax) of BSE 500 companies. 366 companies have recorded a growth in PAT in 2008 as against 402 companies in 2007. Amongst the 58 PSUs in the BSE 500, 80 per cent of the companies showed an upsurge in their PAT in 2008 as against 92 per cent in 2007. However among the private sector companies, only 64 per cent have been able to post an increase in their PAT in 2008 as against 90 per cent in 2007. This shows that despite the turbulence in the markets, PSUs have been able to provide more sustainability both in 2008 and 2007.

These above mentioned figures have also helped the companies lead in terms of providing dividends to their shareholders.

If we look at the yield of the major indices - BSE Sensex and the BSE PSU Index - the dividend yield of the former is 1.93 as against the latter's 2.57 (25th February, 2009). This strongly reflects the dividend paying capabilities of the PSU companies and also emphasises their rich cash reserves and strong fundamentals. Even now with current economic slow-down the generosity of PSUs has not taken a back seat, as till now in 2009, 12 PSU companies have declared their interim dividend.

The real test of any company is when the markets turn negative and amidst such tough times, if PSUs have stood vindicated, then they certainly are the real heroes.

  BSE PSU  BSE Sensex
  An index to track the performance of listed PSU companies  An index to track 30 largest stocks of well established companies
Profit (Rs Cr) Q3FY09 21,726 24,875
Market Cap (Rs Cr)* 904,713 636147
Yield (%)* 2.57 1.94
Return (%)    
2007 73.49 47.14
2008 -50.34 -52.61
*Data as on February 27, 2009