BJP’s Coalition Government: Can PSUs Hold Their 94% Surge?

In the past year, public sector undertakings (PSUs) have been in the limelight, thanks to government reforms. The S&P BSE PSU index soared by 94%, outperforming the Nifty 50’s 22% gain. However, the BJP failed to win a majority in the 2024 elections, leading to the formation of a coalition government. This could pose risks to PSU stocks, especially in sectors like fuel and power, which are politically sensitive.

Fuel Prices and Political Risks

Fuel prices, including petrol, diesel, and LPG, are crucial in politics. The BJP government allowed oil companies to recover past losses from high crude oil prices without reducing fuel prices, even though Brent crude prices fell in FY24. With a coalition government, there may be pressure to keep fuel prices low, regardless of international prices, which could hurt the financial health of oil marketing companies (OMCs) like HPCL, BPCL, and IOC. Since HPCL is a subsidiary of ONGC, any negative impact on HPCL also affects ONGC. The windfall tax on ONGC was $10 per barrel in FY24 when gross realization was $82 per barrel. This tax might increase, making it harder for ONGC to benefit from higher crude oil prices.

Challenges for Power Sector PSUs

Nitish Kumar, leader of the Janata Dal (United), a coalition partner, is pushing for subsidized electricity rates from NTPC and other central producers. Similar demands might arise from other partners, like free agricultural power in states controlled by the Telugu Desam Party (TDP). Although NTPC might not directly provide discounted power, the financial health of state electricity boards (SEBs) or distribution companies (Discoms) could suffer, leading to delayed payments to NTPC. Before Modi’s government in 2014, SEBs and Discoms faced financial distress with over ₹3 trillion in losses and ₹2 trillion in debt. Power sector reforms like the Ujwal DISCOM Assurance Yojana (UDAY) improved the situation, but these reforms could be at risk again.

Defence and Metal PSUs: Lower Risk

Defence PSUs like Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) face less risk from policy changes. They have strong order books, with HAL at ₹94,000 crore and BEL at ₹76,000 crore, ensuring revenue for the future. Metal PSUs like Steel Authority of India Ltd (SAIL) and National Aluminium Co. Ltd (Nalco) are generally not affected by government policy changes because their product prices are less politically sensitive compared to fuel and power prices.

Despite high dividend yields and low valuations, especially for OMCs, cautious investors might want to avoid PSU stocks for now due to potential risks from the coalition government.