Beyond the PSU stock hype

Public sector companies have been the talk of the town lately. After disappointing their investors for the last decade, they finally turned and provided good returns in recent times. But is there a reason for caution? Let's review.

In general, the share performance of these companies was a result of impressive operational turnarounds. Another significant reason for this performance was the increasing government thrust toward capital expenditure. Further, some segments, like the public sector banks, underwent a massive cleanup in their balance sheets during 2015-2019 and thus gave high returns.

However, the thing about themes is that once a theme gets rolling in the market, even the weaker companies join the bandwagon. So, investors must be aware of these rotten apples, which look lucrative while their fundamentals are not in place. It is for companies like these, that Warren Buffett once said, "Only when the tide goes out do you learn who has been swimming naked."

When we set out to study PSUs, we found some companies that have delivered a 16-153 per cent rise in the last few weeks. However, when diving into their operations, we found that the rally may not have a reason. Most of them were loss-making, and some did not even have any revenues. Even those that made profits did so majorly due to other sources of income. It was shocking to see how these companies were able to give such returns, because in some cases, the Government has already announced a shut-down for these companies in future.

One of the factors leading to their sudden movements can be attributed to the free float left for the market. Some companies don't even have one per cent of float. Though SEBI regulates listed companies to maintain promoter holding to 75 per cent or less, it does make some exceptions for government companies.

Another factor to note is the low institutional holding in these companies. Combining the current PSU trend, low float, and their poor quality, these companies are susceptible to rumours.

So, while there is no doubt that many government companies have improved remarkably recently, one must not assume the same for all PSU companies. For instance, these low-float, poor-quality PSU stocks look doubtful. Hence it is important that as an investor, you do your due diligence and not fall for market fads that are going on with enticing returns.

Also read: The high-flying PSU

This article was originally published on October 25, 2023.