PSU Stocks Rally Raises Chances Of Government Divestment

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New Delhi: The heavy election calendar will likely exert pressure on the government to boost social spending with schemes to boost annual transfers to farmers, expand health insurance, and interest subsidy on home loans, foreign brokerage Jefferies said in a report.

State freebies have already started in a big way. The fiscal performance is weak year-to-date (YTD) with tax collections 3 percent YoY (Apr-Jul), vs. budgeted 10 percent for FY24. A slowing nominal GDP (+8 percent in Q1) and rising oil prices / potential populist pressures will restrict tax revenue surprise. ()

Meanwhile, expenditures in an election year will be tough to cut, partly as upfronting of spending (+23 per cent YTD vs +8 per cent budgeted) reduces the headroom. Sharp PSU rally though raises chances of government divestment in the near term, the report said. ()

Potential reallocation towards social spending might drive incremental pressure on PSU disinvestments, the report said. With Brent Crude Oil price at $90/barrel+, the headroom for a fuel price cut around Diwali (4Q23 festive season) is gone.

The reverse may happen though with diesel prices already implying losses for PSU oil companies, the report said. Rising oil prices have adverse implications for the rupee as well with every $10/barrel swing implying a 0.4 percent change in the CAD.

“Rich valuations, oil/fiscal worries & near-term state elections could raise market volatility. Tactically we reduce portfolio beta somewhat and trim weight on midcap industrial and property OWTs and shift weight to laggards/cash," the report said.