PSU stocks may see gains under Modi 3.0
‘Limited upside in premium valuation if reforms slow down’
Shares of public-sector undertakings (PSUS) should be accumulated at lower levels after they took a beating on June 4, when Lok Sabha results gave a reduced mandate to the government, say analysts.
They argue that the stocks will continue being the prime beneficiaries of the government’s focus on capital expenditure. “Significant investments in infrastructure, energy, and defence projects have created a predictable order pipeline for PSUS, boosting revenue streams. Furthermore, PSUS have demonstrated steady earnings growth, consistent dividend payouts and hold strategic importance in critical sectors, which strengthens investor confidence,” said Ajit Mishra, senior vice-president for research at Religare Broking.
He said investors should take advantage of market dips in sectors with robust growth prospects, such as renewable energy, infrastructure and defence.
PSU stocks, down and up
When the Bharatiya Janata Party (BJP) fell short of a clear majority in Parliament on June 4, PSU stocks tumbled up to 30 per cent in intraday trade. Sensex and Nifty indices closed nearly 6 per cent lower each.
Since then the Nifty PSE index has gained 12 per cent with individual stocks such as Container Corporation of India, BHEL, ONGC, GAIL, Coal India, and NHPC surging up to 20 per cent in six sessions (till June 12).
The frontline 50-stock index, on the other hand, has recouped around 6.6 per cent.
Analysts say the view that a coalition government may put the brakes on PSUS’ growth is misplaced as the BJP remains the largest party in the National Democratic Alliance (NDA).
“I do not think that a coalition government will affect the premium much in the PSU space as PSU stocks are in a bull run. While one should be cautious of the premium valuations that certain sectors may operate on, overall those betting against PSUS will likely be punished in this upswing,” said Anirudh Garg, partner and fund manager at Invasset.
Market experts believe the BJP’S NDA partners will likely support budgetary allocations to the Psu-related sectors and their indigenisation.
Historical data shows that the Nifty PSE index has outperformed the benchmark Nifty50 in the tenures of four out of eight coalition government.
This was during Atal Bihari Vajpayee’s governments in 1996 and 1998; H D Deve Gowda’s tenure as the Prime Minister in 1996; and Narendra Modi’s second government in 2019.
Analysts believe that the premium valuation of such stocks may see limited upside if PSU reforms slowdown. Sluggish decision-making may affect operations and delay privatisation and disinvestment, which may lead to a reassessment of PSU valuations, they said.
Investment strategy
The Nifty PSE index is trading at a price-to-earnings (P/E) multiple of 13x as against its 5-year trailing twelve month (TTM) P/E of 9x.
Most PSU stocks, including Gail India, BHEL, SAIL, Hindustan Aeronautics and BEL, are trading above their five-year P/E average.
Analysts said investors should select stocks based on their earnings visibility, valuation, and order execution efficiency.
Sanjeev Hota, head of research at Sharekhan by BNP Paribas, recommended defence specialists like BEL, HAL, Mazagon Dock; commodity firms like SAIL, NMDC, MOIL; housing plays like LIC Housing, Canfin Homes, Hudco; financials like SBI, BOI, PFC, REC; power stocks like NTPC, Powergrid, Coal India; and BPCL, HPCL, Oil India.
Anirudh Garg, an analyst with Invasset, prefers sectors such as railways, defence, infrastructure, and power.
“We see defence and railway PSUS closer to fair value, while power and banking are at significant discounts. Within the pack, PSU banks are at the highest discount to intrinsic value,” said Vikas Gupta, smallcase manager and chief executive officer of Omniscience Capital.