New Delhi: The PSU (Public Sector Undertakings) index outperformed the Nifty over the past 12 months, after a decade of underperformance prior to 2020, foreign brokerage Jefferies said in a report.
The recent outperformance has been helped by EPS upgrades and RoE improvement. The index still trades at 40 per cent discount to Nifty, which offers 15 per cent rerating potential. Change of stance from the government towards ‘value maximisation’ for PSUs could take it above average.
The PSU Index outperformed Nifty by 40 percentage points in the calendar year 2023 and another 15 percentage points year-to-date. Stocks across the PSU spectrum have rallied, partly supported by government’s accelerated capex spends, while sector-specific reasons have also helped. Despite this outperformance, the PSU Index PE at 12.1x is 40 per cent discount to Nifty vs. the pre-FY18 discount to Nifty PE of 31 per cent on average.
In the Interim Budget presented on February 1, and subsequent commentaries from the Finance Ministry officials, the government has publicly talked of a positive change of stance towards value maximisation for the PSUs.
A change has already been seen here over the last five years with the government shifting away from the ETF mode of PSU stock disinvestment. The government now sees monetisation of Public Sector Undertakings as a combination of dividends, stake sales and asset monetisation.
PSU top management performance also has a component of stock performance now. Governance improvements could drive longer term rerating for Public Sector Undertakings, the report said.
The PSU banks index is up 78 per cent YoY, outperforming the private banks by 70 ppt. A sharp earnings turnaround on asset quality improvements and attractive valuations contributed to their positive stock performance. PSU banks have also typically enjoyed lower loan-deposit ratios, allowing them to push loan growth.
The oil Public Sector Undertakings performance stocks saw a sharp rally since October 2023 as the government chose not to cut auto fuel prices despite a busy election calendar, and a drop in crude oil prices. The message was reinforced in the Interim Budget, which implies it’s reasonable to assume average marketing margins going forward.
A potential oil price increase remains the risk, the report said.
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