Defying trend: Earnings growth no match for rally in CPSU stocks

Valuation rerating largely behind surge in mcap

Central public-sector undertakings (CPSUs), such as State Bank of India, Bharat Petroleum Corporation, Oil & Natural Gas Corp, Coal India, NTPC, and Hindustan Aeronautics, have been leading performers on the bourses in recent quarters. The BSE PSU index, which tracks the share price of 56 listed CPSUs, has doubled in the past year, compared to a 23 per cent rise in the BSE benchmark Sensex during the same period. 

This boom in CPSUs share price, however, is not in line with their quarterly results. Most of the gains on CPSUs’ market capitalisation have come from valuation rerating, rather than higher revenues and net earnings.

The combined market capitalisation (mcap) of 79 listed CPSUs has more than doubled in the past 12 months, from Rs 26.3 trillion at the end of March 2023 to around Rs 53.4 trillion on Monday. In comparison, the combined net profit of these CPSUs on a trailing 12-month basis is up 42.4 per cent in the past year, from Rs 2.87 trillion in Q3FY23 to Rs 4.09 trillion in Q3FY24.

As a result, these CPSUs’ trailing price-to-earnings (P/E) multiple has risen from 9.9x at the end of December 2022 to 13x now. However, the sharpest rally in CPSU stocks has been in the non-BFSI (banking, financial services, and insurance) and non-oil & gas sector, where earnings growth has been the least.

According to analysts, the rally in CPSUs stock is based on future growth and earnings expectations. “Investors are betting on a favourable political outcome in the upcoming general election, which is expected to provide a growth and earnings boost to CPSUs in FY25 and beyond,” said Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equity.

Others see more upside in CPSU stocks. “Some PSU companies within the financial services and power sectors are still trading at significant discounts to their intrinsic value. The policy framework supporting these companies remains unchanged, facilitating strong order books and focused execution,” said Ashwini Kumar Shami, executive vice-president and portfolio manager at Omniscience Capital.

The combined mcap of 49 CPSUs, excluding BFSI and oil & gas companies, is up 167 per cent in the past year, while their combined net profit on a trailing 12-month basis is up just 0.8 per cent year-on-year (Y-o-Y). As a result, the trailing P/E multiple of these CPSUs has risen from 8.8x at the end of December 2022 to 22.2x (as on Monday).

Similarly, the combined market cap of public sector BFSI companies has doubled over the past year, against a 46.4 per cent Y-o-Y growth in net profit on a trailing 12-month basis, leading to a rise in their valuation.

Oil & gas PSUs, on the other hand, have seen a moderation in their valuation as their mcap has lagged the rise in their earnings over the past year. The combined market cap of oil & gas PSUs is up 37 per cent in the past year, compared to a 93.2 per cent Y-o-Y growth in their net profit on a trailing 12-month basis. CPSUs in the BFSI and oil & gas sectors accounted for 74 per cent of the combined net profit of all CPSUs in Q3FY24.

The listed PSUs also underperformed their private sector peers in Q3FY24 in terms of revenues and earnings growth. The numbers also hint at a contraction in CPSUs’ combined quarterly net profit from its high in Q1FY24.

The combined net profit of 79 listed CPSUs was up 22.9 per cent year-over-year to Rs 95,830 crore in Q3FY24 from Rs 77,968 crore a year ago, driven by margin expansion from lower commodity and crude oil prices. However, the earnings were down 12.6 per cent from a high of Rs 1.1 trillion reported in Q1FY24. In comparison, the combined net profit of non-CPSUs was up 24.3 per cent Y-o-Y in Q3FY24.

With this CPSUs combined net profit has grown in double digits for the fifth straight quarter but their combined revenues grew in low single digits for the third consecutive quarter. The combined net sales (gross interest income for lenders) were up just 3.6 per cent Y-o-Y to Rs 10.56 trillion in Q3FY24. Poor revenue growth in the third came on the back of 0.3 per cent Y-o-Y decline in Q2FY24 and 0.3 per cent growth in Q1FY24.

The combined net profit of CPSUs ex-BFSI and oil & gas companies was up 11.1 per cent Y-o-Y in Q3FY24, while their net sales were down 2.5 per cent Y-o-Y during the quarter, their worst showing since June 2020 quarter. With this, the combined net profit of these companies has remained largely unchanged over the past 12 quarters.

The combined operating margin of listed CPSUs was up 580 basis points or 21 per cent on a Y-o-Y basis to 33 per cent of total income in Q3FY24, from 27.2 per cent in Q3FY23. In comparison, the combined operating margin for non-CPSUs was up just 220 basis or 10 per cent of total income in Q3FY24.