PSU stocks in 2024: Top performers, challenges, and the road ahead

In 2024, PSU stocks delivered a mixed bag of performances, with some achieving remarkable growth while others lagged. Data available from ACE Equity shows that Cochin Shipyard emerged as the best-performing PSU, delivering a stellar 134% return. Its share price surged from Rs 677 to Rs 1,582, with its market capitalisation climbing to Rs 41,618 crore. Close behind was Rail Vikas Nigam, recording a 125% return, and IFCI, which more than doubled its value with a 103% rise. Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers also impressed with returns of 99% and 87%, respectively.

On the flip side, several PSUs witnessed significant declines. Gujarat Mineral Development Corporation was the worst performer, with a 21.9% drop in its share price. Mishra Dhatu Nigam and The Jammu & Kashmir Bank also faced declines of 20% and 19%, respectively.

The PSU sector, represented by the BSE PSU Index, experienced a growth of 20% in 2024, following an impressive 55.3% surge in the previous year. Market experts have shared their insights on the outlook for the PSU sector in 2025.

Anil Rego, Founder and Fund Manager at Right Horizons PMS, highlighted that Indian PSUs, after a decade of lacklustre performance, demonstrated a remarkable resurgence in FY24. The BSE PSU Index in CY24TD/FY25TD rose by approximately 20% and 5%, respectively. This resurgence has been driven by the government’s emphasis on infrastructure and capital expenditure, which gained momentum post-pandemic. Healthier balance sheets, improved governance, favourable commodity margins, and expanding order books have also contributed to the revaluation of PSUs.

Rego anticipates that while FY25 began with a sluggish start in capital expenditure due to elections, a recovery in capex is likely in the second half of the fiscal year. Political stability is expected to positively impact the economy and capital markets by ensuring consistent policy-making, supporting localisation, and continuing the government’s economic agenda. He further predicts that PSU banks will play a pivotal role in driving the PSU trend through improved profitability.

Mohit Khanna, Fund Manager at Purnartha PMS, noted that Indian PSUs predominantly operate in sectors such as oil & gas, utilities, banking, metals & mining, capital goods, railways, infrastructure, fertilisers, chemicals, and defense.

The BSE PSU Index delivered nearly 20% returns CYTD as of December 30, 2024. At its peak, the index had gained 46.6% before correcting by over 18% due to lagging execution of order books and stretched valuations. However, Khanna believes this correction could present a favourable entry point for medium-term investors.

He highlighted that while the government announced an 11% YoY increase in capital spending in the FY24 budget, actual execution has been hindered by factors such as heatwaves, elections, and extended monsoons. These one-offs are unlikely to recur in 2025, potentially paving the way for improved execution.

The upcoming Union Budget in February 2025 will be a crucial trigger for capital expenditure growth. Additionally, Khanna pointed out the market’s uncertainty regarding the government’s focus on direct benefit transfer schemes, which could impact the capex-led growth model.

Khanna emphasised the importance of efficient execution for revenue recognition. The ability of companies to convert order books into revenues quickly and efficiently will determine the sustainability of PSU stock performance. In 2024, utility companies performed well, but mining companies fell short of targets. Oil & gas companies faced challenges from crude price volatility and refining margins, while capex-oriented companies dealt with labour issues and sluggish decision-making at the government level.

Public sector banks (PSBs) have shown an improving NPA situation, which is expected to continue over the next few quarters. They remain well capitalised, though their credit growth lags behind private players. An anticipated rate cut by the RBI next year could boost system-wide credit growth, coinciding with improving economic conditions in rural areas, thereby addressing the slow credit growth in PSBs.