Analysts bullish on banks, defence-related plays in the PSU pack

Stocks of public sector companies have had a good run at the bourses in the first nine months of calendar year 2022 (CY22), with the S&P BSE PSU index rising almost 14 per cent during this period. In comparison, the S&P BSE Sensex gained a modest 3 per cent, data show.

Going forward, G Chokkalingam, founder and chief investment officer at Equinomics Research believes, the PSU index is unlikely to outperform the broader index by any significant margin. The performance of oil & gas sector PSUs, he said, is expected to remain subdued as the government will keep auto fuel prices in check in case crude oil prices were to inch up. On the other hand, a sharp correction in global commodity prices is likely to keep metals and mineral stocks subdued, too.

“Due to elevated fiscal deficit, at some point the defence PSUs might be encouraged to cut down their margin for supplies made to government departments, in my view. So, the onus of outperformance of the PSU index would be left to the banking sector. That said, we do expect PSU bank stocks to move up, but it would be very difficult for PSU banks alone to pull up the index. Hence, the PSU index is likely to underperform in the remaining part of 2022,” Chokkalingam said.

The rally in PSU pack thus far in CY22 was mostly led by stocks from the banking and defence-related verticals, while those of oil & gas and metals & minerals did not contribute much.

Among individual stocks, Bharat Dynamics and Hindustan Aeronautics surged over 100 per cent in the first nine months of CY22 (9M-CY22). Bank of Baroda (BoB), Mangalore Refinery and Petrochemicals (MRPL), Coal India, Bharat Electronics, Indian Bank, Container Corporation of India (Concor), Canara Bank and State Bank of India (SBI) were some of the other key gainers in the PSU pack that surged between 20 per cent and 70 per cent during this period, ACE Equity data showed.

Ashwin Patil, senior research analyst at LKP Securities remains bullish on the road ahead for defence-related plays on the back of a strong order book, including orders from the government under the Ministry of Defence.

“Improvement in profitability of companies in the defence sector led by higher indigenisation theme, better operating leverage and higher contribution from non-government orders should augur well for the margins. Valuations, too, seem comfortable to us for the entire sector. We remain bullish on the sector, particularly on BEL due to additional positives like a lean balance sheet, better working capital management and emphasis on some non-profitable non-defence sectors,” Patil said.

Besides defence-related stocks, analysts expect PSU banks to do well at the bourses as the government becomes aggressive in divesting its stake in state-owned banks. According to recent reports, the government is planning to sell at least 51 per cent of its stake in IDBI Bank. If the economy reflates, analysts at Morgan Stanley expect banks to do fairly well on performance. The outperformers, however, will be those that have the capacity to grow, they said.

“We don’t think capital will be a constraint in the current cycle – most banks have strong capital, and for those that may need to raise capital, we don't see difficulty doing so. The key constraint on profitable growth in the current cycle would be access to retail deposits. Among PSU banks, we prefer SBI and BOB, with Liquidity Coverage Ratio (LCR) of 138 per cent and 143 per cent, respectively,” wrote analysts at Morgan Stanley in a recent note on the sector.