Irrational Exuberance | On Share Prices of PSUs Going Through the Roof

The combined market capitalisation of 78 listed public sector companies at Rs. 68.20 lakh crore exceeded 15% of total Indian market capitalisation — an unprecedented level in decades.

(Photo: Karman Akhter/The Quint)

India’s premier share price index — NIFTY50 — had bottomed out at 8,083.80 on 3 April 2020. On 24 May 2024, it reached a record high of 22,957.10 — growing by 184% in four years.

Public sector shares did phenomenally better. The Nifty PSE Index rose from its lowest level of 2,028.15 on 23 March 2020 to 10,815.7 on 24 May 2024, jumping by 433%. The Nifty PSU Bank Index rose from its lowest of 1,090.15 on 22 May 2020 to 7,528.70 on 3 May 2024, recording a humungous growth of 590%.

The prices of a few individual public sector shares have gone through the roof. For example, MTNL’s share price was Rs 4.95 on 23 August 2019. It peaked at Rs 48 on 9 February 2024, recording a growth of 870%.

What is going on with public sector shares? Why has their performance and profitability improved so dramatically? Is there irrational exuberance? Or, is it madness, or worse, manipulation in some shares?

Listed Public Sector Enterprises

The Public Enterprises Survey 2022-23 (PES-2023) informs that there are 402 Central Public Sector Enterprises (CPSEs); of which 254 are operational. The PES-2023 further apprises that, in 2022-23, 193 CPSEs returned aggregate net profits of Rs 2.41 lakh crore while 55 CPSEs generated aggregate losses of 28,827 crores; six did not finalise accounts.

The Department of Investment and Public Asset Management (DIPAM) informs that the market capitalisation of 62 CPSEs listed on stock exchanges was Rs 43.42 lakh crore on 24 May.

DIPAM also provides market capitalisation details for the listed 12 scheduled public sector banks (PSBs) and four insurance companies. Their market capitalisation exceeded Rs 24.78 lakh crore on 24 May.

The combined market capitalisation of 78 listed public sector companies at Rs. 68.20 lakh crore exceeded 15% of total Indian market capitalisation — an unprecedented level in decades.

Assessing the Valuation of Public Sector Companies

Share prices of CPSEs and PSBs have historically been quoted at relatively low price-earning (PE) ratios.

The PE ratio is the market price of a share divided by its profit/net income/earnings per share (EPS). If the market price of a stock is Rs 200 and its EPS (earnings per share) is Rs 10, its PE is 20.

PE ratio, in simple words, means how much investment per share in a company generates one rupee of profit. Dividing 100 by the PE ratio provides a percentage return/profit on the market price of a stock. In our example, it is 5%. A comparison with prevailing interest rates gives a relative idea of how profitable a share is if purchased at the current price.

Listed public sector companies fall into three broad categories with respect to the return on market price.

There are loss-making companies which generate negative returns. Such PSEs cannot even be evaluated based on the PE ratio. There are a few PSEs in this group; MTNL being one of them. A large number of CPSEs, PSBs, and insurance companies generate relatively small profits. PE ratios of many such companies have turned excessively high on account of run-away increases in their prices. Of course, there are many PSEs and PSBs which generate substantial profits. Their PE ratios and valuations have increased, but not irrationally.

The case of MTNL illustrates the price increase in the last group.

Irrational Exuberance in Low Profit CPSEs

In 2018-19, MTNL had incurred a net loss of Rs 3,388 crore. It has generated huge net losses every year since then — Rs 3,694 crore in 2019-20, Rs 2,461 crore in 2020-21, Rs 2,603 crore in 2021-22 and Rs 2,915 crore in 2022-23.

MTNL’s business is not doing well either. In 2018-19, its turnover was Rs 2,086 crore. In 2022-23, it shrunk to Rs 964 crore. MTNL’s turnover declined by 54% in five years.

Its net losses were 350% of its turnover in 2022-23. For every rupee of sales, MTNL loses four rupees. As of 31 March 2023, MTNL’s equity was — hold your breath — negative Rs 20,855 crore. Yet, its share price has increased by nearly 1000% between August 2019 and February 2024.

MTNL closed at Rs 38.35 on 24 May 2024 — still 775% of its bottom-most price. Can there be any justification for such a price increase? It is not even irrational exuberance. It has to be sheer madness or plain manipulation.

There are a few other such companies, e.g. Fertilisers and Chemicals Travancore (FACT) — that suffered losses in the March 2024 quarter, with a market price of Rs 716.

Irrational Exuberance in Low-profit CPSEs

There are many companies within CPSEs which have very low profitability but their share prices have also run away in the current boom.

Bharat Heavy Electricals Ltd (BHEL) incurred net losses of Rs 1,466 crore on a turnover of Rs 21,463 crore in 2019-20. It started making small profits from 2022-23. It earned a net profit of Rs 282 crore in 2023-24. BHEL’s EPS was a lowly Rs 0.75 in 2023-24. Its share price on 24 May 2024 closed at Rs 305.10, yielding a stratospheric PE ratio of 406, which implied profitability of less than 0.25% on its market price.

BHEL’s business grew from Rs 21,463 crore in 2019-20 to Rs 23,893 crore in 2023-24, generating an annual growth of only 2.7%. Its EPS, in fact, declined from 1.29 per share in 2022-23 to 0.75 in 2023-24. No explanation on earth can justify BHEL’s share price of Rs 305.10 when its turnover grew at such a low rate and profitability was not only poor but also declining.

The PE ratios of many CPSEs exhibit irrational exuberance like IRCTC (286), MOIL (112) and so on. There are several CPSEs with a PE ratio exceeding 50.

Strong and Reasonably Valued CPSEs   

NTPC’s turnover grew from Rs one lakh crore in 2018-19 to Rs 1.76 lakh crore in 2022-23, recording a decent annual growth of over 15%. NTPC’s profits also grew from Rs 13,737 crore to Rs 16,913 crore in this period, though at the not-so-impressive growth rate of 5.33% per annum.

NTPC’s EPS was Rs 12.77 in 2018-19 and Rs 17.73 in 2022-23. NTPC’s lowest price of Rs 79.55 on 3 April 2020 yielded a PE of 8.55. NTPC’s share price of Rs 374.50 on 24 May 2024 led to a PE of 21.1, yielding a return of about 5% return. The share price of NTPC has grown higher than its historical valuations but doesn’t indicate any exuberance.

There are quite a few other such CPSEs with solid PEs — Powergrid (18.49), ONGC (7.05), NMDC (16.9) etc.

Shaky Run-up in Some PSBs 

Many PSBs remained under the Prompt Corrective Action (PCA) framework during 2016-2020. Their share prices plummeted massively.

The Indian Overseas Bank (IOB)’s share price was only Rs 7.00 on 3 April 2020. It closed at Rs 67.25 on 24 May 2024, increasing by 860%. The IOB reported a net loss of Rs 8,527 crore in 2019-20. It turned around from 2020-21 and reported a net profit of Rs 2,666 crore in 2023-24, indicating quite a remarkable swing in profitability. IOB’s EPS of Rs 1.45, however, makes its PE exceed 46.

PSBs have been historically valued at PEs of 10-15. IOB’s PE of 46, which yields a return of just over 2%, is excessive. Contrast IOB’s case with the State Bank of India (SBI).

SBI has been continuously in profits from 2019-20, rising from Rs 19,768 crore in 2019-20 to Rs 67,085 crore in 2023-24. SBI’s EPS is Rs 81.11. Its share price of Rs 828 on 24 May 2024 discounts its EPS only by 10.2 times (PE). There is no rational explanation for IOB’s PE of 46 when SBI’s is barely 10.

A similarly irrational pattern can be seen in some other PSBs like UCO Bank, Central Bank and so on.

Policy is Partly Responsible for This

The government’s policy decisions have also contributed to making the ground ripe for a rally in public sector shares.

The government has discontinued the privatisation and disinvestment programme. The government has also exempted many CPSEs from the minimum public holding norm of 25%, resulting in low floating stock in the market.

In addition to jacking up capital expenditure, the government placed large orders on some CPSEs with high built-in margins, boosting their profitability.

Abandoning market price mechanisms for oil marketing companies helped them not only recover their under-recoveries but also over-charge prices.

Massive capitalisation of PSBs and the absence of disinvestment led to a situation where the government is holding equity in excess of 90% in quite a few of them.

PSB profits got a boost by linking interest rates on housing and other loans to the repo rate, which was increased by 250 bps (basis points) by the Reserve Bank of India, allowing banks to earn much higher interest margins.

In the consumer market, the maxim caveat emptor (consumer beware) has never been more relevant for the public sector share market in India. Exit before it is too late for loss-making shares and exercise caution for high PE shares.

(The author is the former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)