5 PSU stock ideas: What MOFSL says on Modi 3.0, valuation premium 

The profitability of PSUs is likely to improve notably across domestic and global cyclicals, with a sharp turnaround in the fortunes of PSU banks driving the overall trend, said Motilal Oswal Financial Services in its latest note. 

The brokerage said that higher commodity prices over the last two years have strengthened the profit & loss and balance sheets of metals and oil & gas PSUs. The government’s emphasis on localisation, increased capex, and ‘Make-in-India’ in the defense sector has catalyzed the improvement in the fortunes of industrial PSUs, it said as the brokerge expects the recovery in PSUs’ contribution to earnings and market capitalisation to continue.

"Given the continued earnings momentum and guidance, we believe the valuation premiums for PSUs are expected to sustain in the near term. However, due to the multi-year high valuation and sharp run-up in select PSU stocks, earnings guidance vs. delivery would be the key monitorable," it said.

Its preferred PSU stock ideas include State Bank of India (SBI), Coal India Ltd, GAIL Ltd, HPCL and Bank of Baroda.

"After a decade of underperformance, the Indian PSUs have made an admirable comeback. They have marked FY24 as the year of clear outperformance. This was evident in the sharp run-up of PSU companies and their index outperformance compared to the Nifty-50 in the previous yea," the brokerage said.

During FY19-24, PSU earnings reported a 33.8 per cent CAGR, outperforming that of the private Sector, which posted an 18.6 per cent CAGR over the same period. The share of PSUs in the profit pool expanded to 36 per cent in FY24 after hovering in the 17-30 per cent range during the past few years. 

The earnings of PSUs in FY24 saw a strong growth of 45 per cent YoY.

"Notably, the loss pools of PSUs have reduced consistently over the last five years. The contribution of loss-making companies (accounting for 1 per cent of profit pool as of FY24 vs. 45 per cent in FY18) has dwindled over the past few years. The RoE of the PSU universe also jumped to 17.6 per cent in FY24 from the lows of 5.2 per cent in FY18," it said. 

Among its PSU coverage, which is 55 per cent of Indian PSU m-cap, MOFSL expects FY24-26 PAT CAGR may moderate to 6 per cent, mainly due to conservative margin assumptions for oil & gas sector. The earnings growth for other sectors continues to remain strong, it said.

"Ex O&G, we estimate a PAT CAGR of 15 per cent for MOFSL Coverage PSU Universe. For the said Universe, incremental profits would be contributed by BFSI (120 per cent), followed by Metals (22 per cent). O&G is likely to drag the earnings CAGR with an adverse contribution of -47% to overall profitability," it said.

Meanwhile, the political stability with Modi 3.0 augurs well for the economy and capital markets as it provides the necessary stability and continuity in policy-making which will likely continue pushing its economic agenda.

"This verdict and the consequent political stability and continuity in policymaking will act like an icing on the cake and keep India as the cynosure of all eyes, in our view," the brokerage said.