Over half of the public sector undertakings (PSUs) in the BSE PSU index have delivered positive returns in the ongoing calendar year till September 19. The outperformance is also visible in the BSE PSU index which has gained nearly 15 per cent year-to-date (YTD). On the other hand, the benchmark BSE Sensex has increased 1.52 per cent during the same period. Market watcher Deepak Kumar Lalla, MD & CEO, SBICAP Securities in an interaction with Business Today said that a couple of positive triggers have been supporting various PSU sectors including banking, defence and power, among others.
With a gain of 139 per cent, defence firm Bharat Dynamics emerged as the top gainer in the BSE PSU index in 2022 so far. It was followed by Hindustan Aeronautics (up 105 per cent), Bank of Baroda (up 72 per cent), Mazagon Dock Shipbuilders (up 64 per cent), MRPL (up 61 per cent) and Bharat Electronics (up 58 per cent).
The story so far
Sharing his views on defence sector, Lalla said, “The outperformance in defence companies is driven increase in spending on the sector by the government of India on the back of heightened geo-political tensions, strong order book offering strong revenue visibility.” He further added that cheaper valuation coupled with India’s plan to increase sourcing of defence equipment from domestic companies and rely less on external partners further boosted sentiment.
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Data further highlighted that other public sector banks including Indian Bank, State Bank of India, Canara Bank and Punjab National Bank also rallied between 8 per cent and 47 per cent YTD.
Commenting on the outperformance of PSU banking stocks, Lalla added that PSU banks have reported healthy set of earnings during the June quarter with majority of them reporting improvement in asset quality, healthy provision coverage ratio and robust credit growth outlook.
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“Street is estimating that majority of the PSU banks to report sustainable profit growth in FY23 and FY24. Earlier, PSUs such as Bank of Baroda, Indian Bank and Canara Bank underperformed for many years due to inadequate capital, high non-performing assets and uncertainty over M&A,” he said.
Power generation companies such as NTPC (up 38 per cent YTD) and NHPC up 25 per cent YTD) also outdid the BSE PSU index. The market expert explained that the outperformance came on the back of expectation of monetisation of renewable energy portfolio by NTPC and completion of large capex in NHPC thereby leading to increased hydroelectric power generation capacity during FY23E and FY24E.
Metal and mining major Coal India also hogged the limelight on D-Street with a return of nearly 58 per cent YTD. Container Corporation of India (up 22 per cent), Cochin Shipyard (up 12 per cent) and Rites (up 12 per cent) stood among the other major gainers in the index on a year-to-date basis.
The road ahead
Going ahead, Lalla believes that PSU banks and defence sector may continue to deliver healthy returns over the next 3 to 12 months.
“PSU companies in sectors like general insurance, re-insurance and oil & gas should be avoided, as profit outlook continues to remain uncertain,” he said adding metals and mining companies should move sideways till the time recessionary narrative is at play in developed economies like the US and Europe.
Insurance firms including The New India Assurance Company and General Insurance Corporation of India have retreated 37 per cent and 11 per cent YTD.
Things to watch
While investing in PSU stocks, Lalla advised investors to zero in on any policy overhang and probability of government intervention thereby impacting profit growth of the company. For instance, subsidy burden on oil marketing companies during buoyant crude oil prices, sustainability of the earnings growth over next 2 to 3 years, relative valuations as compared to the benchmark indices and its peers in private sector and change in top management and offer for sale (OFS) overhang, if any.
Stocks to buy
Considering the ongoing momentum in sector PSU themes, Lalla believes that players like Bank of Baroda, Canara Bank, Hindustan Aeronautics, Bharat Dynamics, NTPC, Power Grid and IRCTC can deliver positive returns in the next 12 months.