PSU stocks have been witnessing strong outperformance fuelled by strong earnings momentum, robust business narratives, growing order book and revival in profits. The market cap share of PSUs in India has recovered and currently stands at 17.5% from 10.5% in FY22.
During FY19-24, the public sector undertakings (PSU) reported earnings CAGR of 33.8%, outperforming that of the Private Sector, which posted an 18.6% CAGR over the same period.
The share of PSUs in the profit pool expanded to 36% in FY24 after hovering in the 17-30% range during the past few years. Further, the earnings of PSUs during FY24 witnessed a spectacular growth of 45% YoY, brokerage firm Motilal Oswal Financial Services said.
Moreover, the loss pools of PSUs have reduced consistently over the last five years and the RoE of the PSU universe also jumped to 17.6% in FY24 from the lows of 5.2% in FY18.
During FY24, the PSU index returns of 92.4%, significantly outperformed the benchmark (28.6%). Further, the outperformance continues as of FY25 YTD, the PSU index is up by 18% versus the benchmark (up 5.5%).
Strong earnings pickup with underlying RoE expansion, healthy macros, policy tailwinds and an optimistic management outlook led to the sharp valuation expansion for PSUs over the past few years, said Motilal Oswal.
It believes the profitability of PSUs is likely to improve notably across domestic and global cyclicals, with a sharp turnaround in the fortunes of PSU Banks driving the overall trend.
“Higher commodity prices over the last two years have strengthened the P&L and balance sheets of Metals and Oil & Gas PSUs. The government’s emphasis on localization, increased capex, and ‘Make-in-India’ in the defense sector has catalyzed the improvement in the fortunes of Industrial PSUs. Hence, we expect the recovery in PSUs’ contribution to earnings and market capitalization to continue,” Motilal Oswal said.
Given the continued earnings momentum and guidance, it believes the valuation premiums for PSUs are expected to sustain in the near term. However, due to the multi-year high valuation and sharp run-up in select PSU stocks, earnings guidance versus delivery would be the key monitorable.
Fundamentally, India is witnessing its own mini-Goldilocks moment with excellent macros, robust corporate earnings, focus on manufacturing, capex and infrastructure creation, and valuations at ~20x one-year forward earnings, it noted.
“The political stability with Modi 3.0 augurs well for the economy and capital markets as it provides the necessary stability and continuity in policy-making which will likely continue pushing its economic agenda. This verdict and the consequent political stability and continuity in policymaking will act like an icing on the cake and keep India as the cynosure of all eyes, in our view,” the broking house said.
For MOFSL Coverage PSU Universe (~55% of Indian PSU Mcap), it estimates that the FY24-26 PAT CAGR is likely to moderate to 6%, mainly due to conservative margin assumptions for Oil & Gas. Conversely, the earnings growth for other sectors continues to remain strong.
Ex-Oil & Gas, it estimates a PAT CAGR of 15% for MOFSL Coverage PSU Universe. For the said Universe, incremental profits would be contributed by BFSI (120%), followed by Metals (22%). O&G is likely to drag the earnings CAGR with an adverse contribution of -47% to overall profitability, it said.
Motilal Oswal’s preferred PSU stock ideas are State Bank of India (SBI), Coal India, GAIL India, Hindustan Petroleum Corporation Ltd and Bank of Baroda.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
