Notwithstanding the recent sharp decline in the stocks of public sector companies, analysts at Jefferies remain bullish on this segment.
State Bank of India, Coal India, and NTPC are their top picks in this space, they said in a recent note.
The public sector undertaking (PSU) or state-owned enterprise (SOE) index, with a 70-percentage-point outperformance versus the National Stock Exchange Nifty50 over the past 12 months, comes after a decade of underperformance before 2020.
Jefferies stated that the recent outperformance (before the sharp fall seen in the past few sessions) was aided by earnings per share (EPS) upgrades and return on equity (RoE) improvement.
“Despite this outperformance, the PSU index price-to-earnings (P/E) ratio at 12.1x represents a 40 per cent discount to Nifty compared to the pre-2017-18 discount to Nifty P/E of 31 per cent on average.
"Though PSU index valuations prior to 2012 are not available, our checks suggest that public sector banks (PSBs), power/coal utilities, and select oil and infrastructure companies had significantly higher multiples over 2006-12,” wrote Mahesh Nandurkar, managing director at Jefferies, in a note co-authored with Abhinav Sinha and Nishant Poddar.
According to Jefferies’ note, PSU RoE a few years ago had dipped from the 14-15 per cent level to 4-6 per cent, primarily due to the drag from PSBs, among others.
The overall RoE has since improved back up to 12-13 per cent, as profitability has recovered and is expected to improve further.
Most PSUs, the note said, have also seen large EPS upgrades across brokerages, with notable exceptions being Oil and Natural Gas Corporation, Container Corporation of India, and Bharat Heavy Electricals.
Not so bullish
Those at Kotak Securities, on the other hand, remain cautious in this space and suggest that the market is overly focused on near-term ordering and profitability of PSUs while ignoring the large downside risks to their medium-term profitability, business model challenges, and disruption risks.
At the bourses, meanwhile, the S&P BSE PSU Index has moved up over 90 per cent in the past 12 months.
Individual stocks have seen a sharp rally, generating returns of 19 per cent to 443 per cent over this period.
Among them, capital goods, electric utilities, financials, and oil, gas, and consumable fuels have been the major leaders in the PSU rally during this period.
Thus far in calendar year 2024, Indian Railway Finance Corporation, NBCC (India), Indian Overseas Bank, Punjab & Sind Bank, Housing and Urban Development Corporation, UCO Bank, RITES, Rail Vikas Nigam, Indian Oil Corporation, NHPC, and Bharat Petroleum Corporation have been the top PSU gainers, rallying 29 per cent to 55 per cent, according to ACE Equity data.
“We find certain assumptions surrounding the medium-to-long-term growth and profitability of these sectors to be highly optimistic.
"We doubt much has changed in most sectors.
"While electric utility PSUs are at risk of weakening RoE profiles/long-term disruption, oil-marketing companies are at risk of high volatility in marketing margins,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities, in a recent note co-authored with Anindya Bhowmik and Sunita Baldawa.
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