“PSUs delivered robust returns due to effective governance”, says PM Modi

Public sector undertakings (PSUs) have undergone a significant evolution in the past 10 years, experiencing substantial growth in both revenue and profitability. There are hopes that specific industries will gain further due to the government’s focus on ‘Make in India’ and a heightened capital expenditure.

At the India Today Conclave 2024, held recently, Prime Minister Narendra Modi said, “Most of the PSUs have been delivering robust returns to investors due to our effective governance. Investors are now confident in PSUs. Profit of PSUs has surged over 2 times in the last 10 years. The net worth of PSUs has touched Rs 70 lakh crore against Rs 9.5 lakh crore a decade ago. You will get such results when you think about the nation first. Companies like Hindustan Aeronautics Limited (HAL) are generating record revenue and insurance behemoth Life Insurance Corporation (LIC) is also getting stronger.”

The PSU sector, once overlooked in the equity market, has delivered lucrative returns since the lows during Covid. The success is attributed to positive advancements in various PSU segments such as power, defence, railways, and banking. The BSE PSU index has gained over 325% from the Covid lows scaled in March 2020, while the benchmark BSE Sensex has rallied 172% during the same period till March 18, 2024.

At least 9 PSUs have delivered over 1,000% returns since Covid lows. With a rally of 2,546%, Fertilisers and Chemicals Travancore emerged as the top gainer on the list. It was followed by RVNL (up 2,121%), Gujarat State Financial Corporation (up 1,759%), Chennai Petroleum Corporation (up 1,394%), and Hindustan Copper (up 1,335%). HALs, Indian Bank, BHEL, and IFCI also gained over 1,000% during the same period.

Public sector banks have seen a remarkable turnaround in financial year 2023-24 (FY24) -- from record losses to record profits -- as their aggregate earnings crossed the Rs 1 lakh crore mark. “Strong earnings recovery is attributed to steady credit growth, significant improvements in asset quality, and stable to positive margins,” Motilal Oswal Financial Services said in a report.

Jammu & Kashmir Bank, Indian Overseas Bank, Bank of Maharashtra, Canara Bank, UCO Bank, Union Bank of India, Punjab & Sind Bank, Central Bank of India, Bank of Baroda, Bank of India, State Bank of India, and Punjab National Bank also gained somewhere between 230% and 920% since pandemic lows.

Sharing its view on SBI, Jefferies said that the country’s largest lender by assets can leverage its strong deposit franchise, improved digital offerings, and leadership across lending segments to deliver 13% compound annual growth rate (CAGR) in loans over the next five years. Operating efficiencies can be a big push to improve profitability, as the cost-to-income ratio is high at 61% and the bank can extract synergies from branches and staff. Credit costs have bottomed, but will rise to more sustainable levels of 50-60 bps as the bank has retained better underwriting on retail and corporate books. “The ability to raise capital will be essential to aid growth; the bank can monetise stake in subsidiaries. We see an 18% CAGR in earnings per share and a return on assets (ROA) of 1.2%. Our five-year target price is Rs 1,860, implying 150% returns over 5 years,” the global firm said.

The combined profit after tax of the PSU basket has surged by over 2.4 times to Rs 3.77 lakh crore in FY23 against Rs 1.67 lakh crore in FY14. Meanwhile, total income of the PSUs also crossed Rs 50 lakh crore for the first time in FY23.

Sharing his views on PSU stocks after the recent rally, Vikas Khemani, Founder, Carnelian Asset Advisors said, “The PSU basket may consolidate after the recent rally. However, there is a lot of potential left in PSU space in the long run.”

Data further highlighted that Gujarat Mineral Development Corporation, MSTC, Bharat Dynamics, Bharat Electronics, Mangalore Refinery And Petrochemicals, Housing & Urban Development Corporation, Cochin Shipyard, Oil India, BEML, Ircon International, REC and NBCC (India) also gained over 500% since Covid lows.

“The performance of PSU oil stocks has seen a sharp rally since October 23 as the government chose to not cut auto fuel prices despite a busy election calendar, and a drop in crude oil prices. The message was reinforced in the February 1 Budget, which implies it’s reasonable to assume average marketing margins going forward. A potential increase in the oil price remains the risk,” Jefferies said in a report last month.