Arguing that PSU stocks are still trading at a discount despite the gravity-defying rally, global brokerage firm Jefferies has said that the government’s change of stance towards value maximisation for state-owned companies could take valuation above average levels. Within the PSU basket, its top picks are SBI, Coal India and NTPC.

The PSU index has outperformed Nifty by 40 ppts in CY23 and another 15 ppts so far in 2024. Stocks across the PSU spectrum have rallied, partly supported by the Modi government’s accelerated capex spending but also sector-specific reasons have helped.

“Despite this outperformance, the PSU Index PE at 12.1x is at a 40% discount to Nifty vs the pre-FY18 discount to Nifty PE of 31% on average. Though PSU index valuations before 2012 are not available, our check of valuations suggests that PSU Banks, power/coal utilities, and select oil and infra companies multiples over 2006-12 were significantly higher,” said Mahesh Nandurkar of Jefferies.

The ROEs of PSUs dipped from 14-15% level to 4-6% primarily due to the drag from PSU banks, among others. “The overall RoEs have improved back up to 12-13% as the profitability has recovered and should improve further. Most PSUs have also seen large EPS upgrades with notable exceptions being ONGC, Concor, and BHEL,” he said.

A change in the government’s stance is also helping the rally sustain. The government now sees monetisation of PSUs as a combination of dividends, stake sales, and asset monetisations. “PSU top management performance also now has a component of stock performance. Governance improvements could drive longer-term rerating for SOEs,” Jefferies said.

The PSU Bank index is up 78% YoY, outperforming the private banks by 70 ppt, while oil PSUs have seen a sharp rally since October 2023 as the government chose not to cut auto fuel prices despite a busy election calendar and a drop in crude oil prices.Jefferies said NTPC’s expected EPS growth of 10-12% is higher than that of PowerGrid’s single-digit EPS growth.”However, going by 2006-12 example, both have further rerating potential. Also, with thermal capacity addition planned, Coal India should be another major beneficiary as a coal supplier to thermal plants. India has ample coal reserves, but the mining activity needs a step up to meet the demand. Last 3 years volume growth was 10% CAGR. If this is repeated over the next 2, it would be a positive surprise. The stock still looks cheap at 8.3x Mar’25E PE and 6% dividend yield,” the brokerage said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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