India Strategy -Govt is selling, but is it worth buying? ::Macquarie

Visit http://indiaer.blogspot.com/ for complete details �� ��


India Strategy
Govt is selling, but is it worth buying?
How far will PSUs go?
Buying at the peak? The BSE PSU index has outperformed the Sensex by
300% in the last 10 years. While this outperformance was fundamentally driven
as PSUs (Public Sector Undertakings) improved ROEs by 1,200bps, valuations
are now on par with those of private sector companies. The Indian government
has lined up IPOs and FPOs worth US$25bn for the next 12-18 months and, in
our view, has rightly timed the sale at the peak. However, we think it will require
substantial reforms for PSUs to improve further from here. We have Outperform
ratings on only 8 out of 22 PSUs that we cover.


It’s time to be selective
Amongst PSUs we prefer GAIL, OIL India, NTPC, Coal India, PFC over
ONGC, SBI, BHEL, Nalco and SAIL. Amongst PSUs vs private, we prefer L&T
over BHEL; RIL over ONGC; ICICI over SBI; JSP over SAIL.

Discussion on PSU reform is back in favour this season
PSUs have advanced in the post-reform era: PSUs were big gainers post
liberalisation in 1991 as they had a head-start with large scale capacity and
gained from rising demand, leading to ROA improving five-fold from 1% to 5%
over the past two decades. The private sector had substantial capex post 1991,
and accumulated a lot of debt as the Asian crisis affected demand from 1996
onwards. Now, the private sector has recovered, with high demand growth since
2005, and even PSUs are now running to capacity and have started lining up
capex, putting them on an equal footing.

PSUs face competition and policy issues for growth: PSUs have flourished
under monopolistic conditions and, with the economy now opening up, are facing
intense competition. While demand is strong and PSUs appear to have space to
grow, we think it will be difficult for PSUs to keep pace with the private sector.
PSUs also have a daunting task of managing HR issues – ie, losing experienced
employees to the high-paying private sector and attracting young talent.

Borrowings have started to climb and returns are likely to fall: The growth in
borrowings for PSUs has climbed to an all-time peak of 15%. Some of the PSUs,
particularly banks, might raise cash through equity. We believe that PSUs will
face cost overruns and delays in executing capacity and that this will reduce the
return on capital employed.

PSUs now want to acquire companies abroad: PSUs, flush with funds and
not able to grow in India, are looking for acquisitions abroad. We seriously doubt
the ability of PSUs to manage this, however.

Look for competitive advantage
Many of the competitive advantages of PSUs are now beginning to fade.
However, we think there could still be pockets of monopoly, a protected
environment, and possible productivity gains within the PSU space where
investors can maintain exposure – oil and power are two such sectors.
We highlight our Top-10 Focus List for investors looking for high absolute
returns from good quality stocks with superior earnings visibility and growth
potential. Our Focus List has outperformed the MSCI Index and Sensex by
7% and 6% respectively. Glenmark replacing DRRD; booking 35% return since
inception; Glenmark valuations attractive with 34% upside potential.