We are analysing the case for PSU re-rating here. There is a lot of interest and an equal measure of scepticism. There is one camp which believes this re-rating is justified and that there are structural efficiencies which are coming inside now and that this PE re-rating is on the back of fundamentals. The other camp believes that it is just PE re-rating right now and there is a low float angle to it. The earnings are yet to catch up. What is your view?
Anshul Saigal: I think that truth lies somewhere in between. Definitely a PE re-rating has happened, but it is not in thin air. Earnings have grown quite handsomely for some of these companies and that is getting reflected in valuations today. Let me give you an example. The most wanted sector just now is railways.

In 2019, one railways company, which is really an arm of the Ministry of Railways, RVNL, had EPS of Rs 4 for a stock price of Rs 20, which means it was trading at five times earnings. And if you looked at the five-year return on equity profile of this company, it was roughly in the range of 18%. So, a high ROE, high earnings company traded at five times earnings. And to top it all, it gave a close to Rs 2 dividend also in that year, somewhere close to Rs 2, which meant that it had a 10% dividend.

Now, the company had nearly seven years of order book already built into the numbers, which means that it had Rs 10,000 crore of revenues and an order book of roughly about Rs 70,000 crore. Fast forward five years or four years between 2019 and 2023, revenues are up from Rs 10,000 crore to 20,000 crore. EBITDA is up from somewhere close to 500 crore to 1,200 crore. Of course, the stock is up from Rs 20 to Rs 250. So, while there has been a rerating, but on the back of earnings growth for this company, which has led to the market looking at the business in a very different light.

Of course, there is focus on this space today, which is leading to a serious re-rating in the space. I can tell you that this PSU space, particularly on the PSU banking side, was the trade of the century. If you allow me, I will give a two minute lowdown on that space. The PSU banking space for the better part of the last decade had witnessed NPAs inflating and so NPAs in that segment went up to as high as 10% for some of the leading PSU banks.

As a result, you witnessed growth in that space coming off and that led to many of the banks trading at 0.2, 0.3 times price to book. Now fast forward to 2020, 2021 and the NPA cycle had peaked because the government was on a cleanliness drive. NPAs had peaked at 9-10%. Companies had shored up capital and earnings were at rock bottom as also valuations were at rock bottom. Now, when NPAs were bound to come down, it was quite clear that with capital on hand, these banks will go out and grow. And if you compare them to private sector banks, those banks were trading at three-four times price to book. Now, here is 0.2, 0.3 price to book, earnings coming in on a heavy way and valuations were really rock bottom. There was only one way for these banks to go and that was up. We have seen, for instance, even an SBI last year, do an all-time high profitability of Rs 50,000 crore profits, that tells you that something was changing on the ground which led to the PE re-rating. So, those who believe that this PE re-rating has happened in thin air are not really seeing the whole picture.In a few sectors, gains have been predominantly higher. For example, there may be a a utility, renewable kind of a stock that just got listed may have gone up five-six times from the issue price in a short period of time. It all depends on the horizon of the investor and also this government is likely to return to power. Also the efficiency extraction drive are the reasons why these PSU re-rating may very well continue. So, book out and then what? You should have a better investment idea to put that money in, shouldn’t you?
Anshul Saigal: Yes, I could not agree with you more. There are expensive pockets in PSUs and there are cheap pockets also in PSUs. Let us look at the example that I gave you of the railway stock. Now, that trades today at somewhere close to 25 times price to earnings. But then let us look at the PSU banking space. In PSU banking space, ex of SBI, that space trades at 1.2 times price to book on a forward basis, that is FY25 basis.

If you compare the metrics of this space, say ROEs in the range of 16% and earnings growth in the range of 14% to 15% for the next two years, compare that to private sector banks, you will notice that ROEs of private sector banks are also in that range of about 16% and earnings growth over there is also in the range of 13% to 14%. However, the price to book multiples are 2.2 times and higher for private sector banks. So 2x the multiple for similar metrics on earnings growth. Now, can that gap get bridged when PSU banks are trading at four-five times price to earnings even today or some of the other banks are trading between five and ten times?

I do not see that there cannot be upside in these banks from here as well. However, there are certain pockets where upsides are more or less captured, at least in the short term. Your point about the long term is very well appreciated. You wait five years. It is very unlikely that even from these levels, you will not make money in PSUs. But, in the near term, that may be a slight bit of an issue because after moving so much these stocks get consolidated.

So, both points are valid. Certain pockets are expensive. Other pockets are cheap. And the government is doing everything in its power to ensure that the efficiency of operation of PSUs gets enhanced and that will also get reflected in valuations over a period of time. So, overall, it is not as bad as it used to be, say, three-four years back.

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