Marching in lockstep: PSU giants roar back, match Nifty's decade returns

Once left behind, PSU stocks close performance gap after 6-year slump

The stock market performance of public sector undertakings (PSUs) has recently caught up with the overall market following a sharp rise. Over the past decade, the returns for the benchmark National Stock Exchange Nifty 50 and the S&P BSE PSU Index are now nearly identical.

Between 2013-14 (FY14) and 2019-20, the Nifty 50 increased by 28 per cent, while the BSE PSU index declined by 30 per cent. This disparity has been addressed thanks to a fivefold increase in the BSE PSU index since March 2020. During the same period, the Nifty 50 has risen by 2.75 times.

Due to this outperformance, the share of state-owned enterprises in the overall market capitalisation (mcap) has also rebounded. It was 20.8 per cent in March 2014, fell to single digits in March 2020, and is currently close to 18 per cent.

“India’s mcap has skyrocketed to Rs 389 trillion in 2023-24 (FY24) from Rs 69 trillion in FY14, and currently stands at Rs 440 trillion. During FY14 to FY24, PSUs’ mcap surged to Rs 66 trillion from Rs 14 trillion, while the private sector’s mcap catapulted to Rs 323 trillion from Rs 55 trillion,” stated a report by Motilal Oswal.

The recent outperformance has coincided with superior earnings growth by the PSU pack.

“From 2018-19 through FY24, PSU earnings reported a compound annual growth rate (CAGR) of 33.8 per cent, outperforming the private sector, which posted a CAGR of 18.6 per cent over the same period. The share of PSUs in the profit pool expanded to 36 per cent in FY24 after hovering in the 17-39 per cent range in recent years. Additionally, PSU earnings in FY24 saw a spectacular year-on-year growth of 45 per cent,” noted the brokerage in its report titled ‘Indian PSUs: Back with a Vengeance’.

Market observers note that most PSUs are in the domestic cyclical space, a sector that has been performing well due to optimism around India’s economic growth and several government initiatives.

“The government’s infrastructure and capital expenditure push, which gained momentum after the pandemic, along with cleaner balance sheets, improved governance, margin tailwinds for commodities, and burgeoning order books, have continued to drive PSU outperformance and their rerating,” said Motilal Oswal.

Looking ahead, the brokerage anticipates that the profitability of PSUs is likely to improve, especially across domestic and global cyclical sectors, further boosting their contribution to earnings and mcap.