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PSU stocks that will do well in the next few months

PSU stocks that will do well in the next few months

Factors one must look at while analysing a PSU are impact of government policies, balance-sheet strength, revenue, and most important, how much stake the government intends to sell in the future.

Hardly the stock market darlings even in the best of times, stocks of public sector undertakings, or PSUs, have had a torrid 2013 so far. Out of 60 companies in the S&P BSE PSU index, only Container Corporation of India had given some returns this year till October 4. The index fell 24% during the period compared to 2% rise in the BSE Sensex.

Market experts say one reason for the fall is the government's move to sell shares of some of these companies via offer for sale, or OFS, early this year. While these issues increased the supply of shares, their most damaging aspect was the price, which was much less than the level they were being quoted on stock exchanges.

"Investors have refrained from buying these shares due to the flood of OFS caused by the government's attempt to meet its disinvestment target," says S Ranganathan, head, research, LKP Securities. The government, under pressure to raise funds to plug the high fiscal deficit, opted for conservative pricing so that the issues are subscribed.

For instance, the MMTC issue price was set in June at Rs 60 a share, at a time the stock was trading at Rs 210. This spooked investors. On October 7, the stock was trading at Rs 48.45.

Besides, there were reasons specific to each company and sector. Yogesh Nagaonkar, vice president, institutional equities, Bonanza Portfolio, says mining companies have been hit by the ban on mining in several areas, oil PSUs are facing the burden of higher crude oil prices and subsidies, power companies are having a tough time due to shortage of coal and losses of state electricity boards while government banks are reporting a sharp rise in non-performing assets or NPAs.

Most PSUs have a lot of cash, but the failure of the government to use it effectively has led to a fall in investor confidence.


The sector, say experts, is undervalued. It was trading at a price-toearnings, or P/E, ratio of 8.34 on October 7. It had touched a high of 20.81 on 6 October 2010. PE ratio shows how much the market values a stock and is willing to pay vis-vis the company's earnings.

"PSU stocks are looking attractive from a long-term perspective as almost all the negatives have been factored into their price. Broadly speaking, there may be 20% upside for most PSU blue-chips in the next 6-12 months," says Vikram Dhawan, director, Equentis Capital.

Factors one must look at while analysing a PSU are impact of government policies, balance-sheet strength, revenue, and most important, how much stake the government intends to sell in the future.

24% is the fall in the Bombay Stock Exchange PSU indexinthefirst ten months of the current calendar year

The profit of top 60 listed PSUs grew 0.6% in 2012-13 while that of Nifty companies rose 5.3%. The PSU pack was hit by the underperformance of heavyweights such as ONGC, NMDC and MTNL, which offset the big gains made by Coal India, NTPC, State Bank of India (SBI) and PowerGrid Corporation. Experts are not very positive on PSUs for 2013-14. "With Coal India, SBI, ONGC, NMDC, BHEL and MTNL not doing well in the first quarter of 2013-14, we expect a fall in profitability in the range of 1.5-2% this financial year," says Siddharth Rajpurohit, assistant vice president, equity research, The Market Financial Intelligence.

Nithin Kamath, founder and chief executive officer, Zerodha, says, "We expect growth to remain flat, save for a U-turn in the interest rate cycle, which could boost growth across PSUs exponentially." Zerodha is an online brokerage.

In the April-June quarter, MTNL's net loss was Rs 1,256 crore as against Rs 1,059 crore in the corresponding quarter a year ago. However, SBI, ONGC, NMDC, BHEL and Coal India registered net profits of Rs 3,241 crore (down 13.6%), Rs 4,016 crore (down 34%), Rs 1,572 crore (down 17.5%), Rs 465 crore (down 49%), Rs 3,550 crore (down 22%), respectively.


NTPC: It is among India's lowest cost producers of power with a 20% market share. It added more than 4,000 megawatt, or Mw, capacity last financial year, its highest ever. However, the stock has been underperforming due to the financial stress being faced by the company's customers, power distribution companies, and shortage of coal.

"NTPC's revenues and earnings have been growing well. Despite return on equity of 12%, we believe that the stock, trading at 1.5 times book value and 11 times estimated one-year forward earnings, will give a 15% return in the next one year," says LKP's Ranganathan. On October 7, it was at Rs 142.20.

ONGC: Experts say the proposed deregulation of diesel prices augurs well for the company. Nagaonkar of Bonanza says the planned increase in gas prices, regulated by the government, is expected to benefit ONGC in the long run. "Though lower-than-expected subsidy sharing (by the government) and fall in production growth may affect earnings, we continue to remain bullish on ONGC due to the highly favourable risk-reward ratio."

The government compensates oil companies for selling fuel at below the production cost.

Ranganathan seconds Nagaonkar. "The stock is trading at seven times one-year estimated forward earnings, three times EBIDTA and 1.5 times book value. It has a dividend yield of 3.5% and can give a 20% return in the next one year." EBITDA, or operating profit, stands for earnings before interest, taxation, depreciation and amortisation.

Punjab National Bank (PNB): PNB recently started a drive to attract more low-cost current account savings account, or CASA, deposits. At present, these deposits account for 40% of the bank's deposit base, the second-highest among PSU banks after SBI. A good CASA base enables banks to use these low-cost funds for further lending, expanding their margins.

PNB also has decent net interest margins or NIMs (3.5%). The bank expects stable NIMs even in the current high interest rate environment due to strong branch network and a good CASA base. Bad loans are a concern, but due to faster loan recovery there may be less slippages this quarter compared to the last one.

Also, the management does not expect any major restructuring in the near future, which will improve asset quality.

"PNB is attractive from the valuation angle. It is trading at a 62% discount to its average four-year forward book value and a 69% discount to its average four-year trailing book value," says Nagaonkar. On October 7, the stock was at Rs 467.

State Bank of India: A good monsoon will increase the bank's deposit and asset base in the rural sector, where it has a good reach. Since the start of the year, the stock has fallen 31%, and was at Rs 1,652 on October 4. "We expect a 15-20% upside in the next 6-12 months. Banking stocks in general will rally once the rupee stabilises and monetary measures taken by the RBI to defend the rupee are reversed," says Dhawan of Equentis.

"SBI seems to be reasonably priced and could be a good play for the turning interest rate cycle," says Kamath of Zerodha.

Bharat Heavy Electricals (BHEL): According to an Anand Rathi report, after securing orders for 7,800 Mw of BTG (Boiler, Turbine Generator) equipment in 2012-13, BHEL is expected to get orders for 6,000 Mw in 2013-14 as the economy returns to normalcy consequent upon resumption of expenditure on infrastructure.

Urgent expenditure to augment power generation capacity by Maharashtra, Orissa and Tamil Nadu governments will provide BHEL opportunities to augment the order book. Analysts expect the company to end the year with an order book of Rs 95,800 crore and an order book coverage of 2.2 times.

Anand Rathi says the stock can touch Rs 199 in the next few quarters. On October 4, it was at 143.95. Dhawan of Equentis Capital sees 20-25% upside in the next 6-12 months. "We expect the capital expenditure cycle to kick off in a big way in the next few quarters as business environment and liquidity improve. BHEL is well-placed to benefit from these factors."