Retail investor-driven PSU stock rally a play on momentum, dividend yield: Bernstein

Bernstein in its Quant India Strategy note said PSUs are essentially a play on momentum, high volumes, dividend yield and value. The foreign brokerage said two of these styles i.e. momentum and dividend yield still have room to do well in the near-term. That said, Bernstein finds only limited opportunities within PSU portfolio - the ones which are high momentum or dividend yielding stocks with reasonable valuations. It argued against chasing high volume PSU stocks or the ones which are simply value.

The foreign brokerage noted that there was no institutional crowding in PSU stocks except few names. FII crowding can be seen in NMDC, Bharat Electronics, HAL, Bank of Baroda, Canara Bank, Indian Bank and Union Bank. DII crowding is in Gujarat Gas, National Aluminium Company, Container Corp, Indian Bank, Bank of India and HUDCO.

Foreign investors have always preferred private names over PSU names and there has not been any shift in this preference even in recent cycle. Aggregate FII ownership in non-PSUs is at 20.5 per cent against 10-year average of 21.5 per cent and in PSUs at 9.3 per cent against 10-year  average of 9.8 per cent. The PSU rally seems to be driven by retail investors, Bernstein said.

It believes that the PSU pack looks better today fundamentally against history but the consensus view looks too bullish. It called the PSU index The PSU index at 11.2 times one-year forward PE and 1.8 times price to book value expensive,  which it noted is at is +1SD (standard deviation) to the historical average.

"However, relative to the broader market (BSE 500), PSU portfolio is still trading below the historical mean on 12-month forward PE and just slightly above the mean on PB. Industrials PSU stocks are the most stretched, trading at +2.5SD to their 10-year PE average. Typically, PSUs trade at a discount to market, however now Industrial PSUs are

trading at 35 per cent premium to the broader market. Utilities is the second most stretched PSU sector, trading at 1.5SD levels," it noted.

Bernstein said most factors in India are at record valuations on an absolute basis, however both dividend yield and momentum look attractive on relative valuations. Upward revisions have been a key support and there is reasonable room for upgrades to continue.

 

"High volume looks the most vulnerable driven by record valuations - both absolute and relative. The earnings upgrades is also near record high along with extreme crowding. Unlike dividend yield, value portfolio has limited room for earnings upgrades to continue and the trade looks relatively more crowded. Hence, divident yield seems to a better way to play value within PSUs," it said.

 

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