Elara Securities in its latest strategy note said 18 out of 59 listed PSU companies meet its investment criteria and that it is 'Overweight' on PSU stocks including State Bank of India (SBI), NTPC Ltd, Bharat Electronics Ltd, Coal India Ltd, BPCL and HPCL. The broking firm said investor apprehension regarding the turnaround in PSUs is unfounded as moderating trend of government capex so far this year is transient.
The brokerage said PSU sector may see strong recovery in the asset cycle, which, in turn, will result in a robust earnings cycle for PSUs in the next three years. This is because a PSU asset cycle follows the government spending cycle with a two-year lag, thereby lending Elara confidence the cycle is not done yet.
Concerns unwarranted?
"The PSU asset creation cycle also is yet to peak as we believe concerns regarding a continued slowdown in government capex spend are unfounded. The policy drivers remain intact amid inflection in operations and the asset efficiency cycle. The capex pipeline for strategic sectors, such as defense, railways and power, remains robust even as financing concerns remain low as the government pivots to the debt-to-GDP ratio as fiscal anchor," it said.
PSU stocks to buy
The brokerage said the 18 PSU stocks meets its criteria on policy support, funding visibility, execution capability, and operational efficiency. "We are Overweight on SBI within PSU banks as its robust savings deposit metrics places it at par with large private banks. We like GAIL and OMCs within the energy space and NTPC & Coal India among utilities are our other top picks," Elara said.
Elara said NTPC remains a strong play on energy transition as well as energy security. NTPC along with Coal India are well positioned to capture thermal asset cycle expansion, it said.
Among oil & gas PSUs, Elara is most constructive on GAIL India amid visibility of 8-10 per cent growth in gas transmission volume amid continued gasification of the economy. Among OMCs, it prefers HPCL due to its relatively high share of petrol and diesel sales against peers, offering higher tailwinds in a declining crude oil price scenario.
While the past cycles of PSU profit pool have been led by PSU banks, the drivers of earnings and profit pool in the current decade are likely to be oil & gas and Utilities, Elara said. The brokearge noted that power capex pipeline of more than Rs 31 lakh crore until FY30E, power demand CAGR of 5-5.5 per cent, renewed thermal energy mandate of 80GW, and value unlocking through renewable energy (RE) arms of PSUs will continue to support earnings of utilities sector.
The brokerage has neutral rating on NHPC, NMDC, HUDCO, NLC India, SJVN, Oil India, Hindustan Aeronautics, Power Finance Coporation, REC and RITES.
Renewable energy PSU IPOs PSU in India’s power sector, such as NTPC, SJVN, and NHPC, are exploring IPO to fund their green energy ambitions and tap into growing demand for renewable investments. NTPC’s green energy subsidiary NTPC Green Energy (NGEL) has successfully listed its IPO, raising Rs 10,000 crore to fund new projects and meet capex requirements. With 4,294MW of operational solar and wind capacity supported by 25-year power purchase agreements (PPAs), NGEL aims to add 16GW of renewable energy (RE) in the next three years and achieve 60GW capacity by 2032.
"Similarly, SJVN is expanding into solar and wind projects, with plans to reach 25GW by FY30, largely from renewables. NLC India is also planning an IPO for its renewable arm, aiming to increase its renewable assets from 1.4GW to 10.0GW. Currently, the renewable businesses of private companies’ trade at 15 times FY27E EV/Ebitda against 8 times for PSU, highlighting potential upside in PSU valuation," it said.