Will Modi 3.0 spur rally in PSU stocks again? Selectively, say analysts

PSU stocks to buy: Analysts caution that premium valuation of PSU stocks may lead to limited upside from here

PSU stocks to buy: Shares of public sector undertakings (PSUs), which took a sharp beating on June 4 amid a surprising 2024 Lok Sabha election result, should be accumulated at lower levels, say analysts.

Their theory? PSU stocks are reaping benefits of significant policy changes and will remain the prime beneficiaries of the government's focus on capital expenditure ahead.

"Significant investments in infrastructure, energy, and defence projects have created a predictable order pipeline for PSU companies, 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.

Investors, he said, should take advantage of market dips, especially in sectors with robust growth prospects such as renewable energy, infrastructure, and defence.

The coalition roller coaster for PSU stocks

On June 4, the day Lok Sabha election results showed a fractured mandate with the Bharatiya Janata Party (BJP) failing to bag a clear majority, PSU stocks tumbled up to 30 per cent in the intraday trade.

By comparison, the benchmark Sensex, and Nifty indices closed nearly 6 per cent lower each.

Since then, however, the Nifty PSE index has bounced 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.

According to analysts fears, that a coalition government at the Centre may put brakes on the PSU growth story, seem 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 coalition partners will likely support budgetary allocations to the PSU-related sectors and their indigenisation.

Historical data, however, shows that the Nifty PSE index has outperformed the benchmark Nifty50 in four out of eight coalition government tenures. This was during Atal Bihari Vajpayee's governments in 1996 and 1998; HD Deve Gowda's tenure in 1996; and Narendra Modi's government in 2019. SEE TABLE

Nonetheless, while markets hope for more reforms in the PSU space from the BJP-led NDA government, analysts do caution that premium valuation of PSU stocks may lead to limited upside from here if there is slowdown in reform implementation.

Sluggish decision-making, if any, may impact operational efficiencies and delay privatisation and disinvestment initiatives, which may lead to a reassessment of PSU valuations, they added.

Valuation and investment strategy

At present, 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.

Individually, most PSU stocks, including Gail India, BHEL, SAIL, Hindustan Aeronautics, and BEL are trading significantly above their 5-year P/E average. CHECK FULL LIST

Against this, analysts say investors should pick stocks selectively based on their earnings visibility, valuation, and order execution efficiency.

Sanjeev Hota, head of research at Sharekhan by BNP Paribas, for instance, picks Defence names like BEL, HAL, Mazagon Dock; commodities plays like SAIL,NMDC, MOIL; Housing plays like LIC Housing, Canfin Homes, Hudco; Financials like SBI, BOI, PFC, REC; Power value chain stocks like NTPC, Powergrid, Coal India; and Oil and Gas stocks like BPCL, HPCL, Oil India.

Anirudh Garg of Invasset, too, 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 CEO, Omniscience Capital.