After a decade of underperformance, PSUs have made a robust comeback in the past two years with the BSE PSU index jumping nearly 180%. On the other hand, not even a single state-owned company eroded investors’ wealth since June 2022. Mazagon Dock Shipbuilders emerged as a top performer with its shares rising from Rs 234.85 on June 20, 2022, to Rs 3,968.25 on June 19, 2024, marking a rally of 1,590%. Similarly, Cochin Shipyard and Rail Vikas Nigam also saw significant gains, delivering over 1,000% return. The figure shows that an investment of Rs 1 lakh in these stocks turned into more than Rs 10 lakh.
Market watchers believe that the government’s infrastructure and capex push, which had gained momentum post-pandemic, along with a cleaner balance sheet, improved governance, margin tailwinds for commodities and burgeoning order books have continued to drive the PSU outperformance and their rerating.
With a gain of somewhere between 500%-950%, The Fertilisers And Chemicals Travancore, Indian Railway Finance Corporation, Housing & Urban Development Corporation, Garden Reach Shipbuilders & Engineers, Ircon International, IFCI, Bharat Heavy Electricals, Power Finance Corporation, REC, Hindustan Aeronautics stood among other major gainers of the past two years. The benchmark equity index BSE Sensex advanced nearly 50% during the same period.
Overall, the market cap share of PSUs in India, which dropped significantly to 10.5% in FY22 from 20.8% in FY14, has since recovered and currently stands at 17.5%. Going ahead, brokerage Motilal Oswal Financial Services believes that the profitability of PSUs is likely to improve 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 localisation, increased capex and ‘Make-in-India’ in the defence sector has catalysed the improvement in the fortunes of industrial PSUs. Hence, we expect the recovery in PSUs’ contribution to earnings and market capitalisation to continue,” brokerage Motilal Oswal Financial Services said in a report, adding it prefers stocks such as State Bank of India (SBI), Coal India, GAIL, HPCL and Bank of Baroda in the PSU space.
Sharing his views on PSUs, Kunal Shah, Senior Research Analyst, Carnelian Asset Management & Advisors says, “There has been change in governance, focus on transformation and good leadership which has changed the landscape for PSU companies in various sectors. Governments focus on spending across sectors like infrastructure, power, defence, capitalisation of banks have all enabled PSU companies in their respective sectors to grow. We believe select PSU companies where valuations and risk-reward are favourable will continue to do well and create wealth in the coming years, however, one needs to be watchful of valuations as certain PSU company’s trade at rich valuations.”