PSU outperformance over Nifty can continue; investors fear price downtrend

Though there are some inherent downsides, upsides include low valuations, high dividend yield

The last year has seen public sector undertakings (PSUs) outperforming the Nifty50, albeit by a small degree. But PSU valuations are still, on average, less than half of private sector peers at price-to-equity or PE 8.7x for the Nifty PSU Index versus 20.9x for the Nifty50.

There are several reasons for lower valuation. One is that PSUs are usually closely held and given a strategy of divestment, investors are braced for a jump in public float which may lead to a short-term price downtrend.

Investors are also wary about the government interfering with management. The government often taps their reserves.