Another year goes by with hardly any upside in the PSU stocks. Marred by institutional focus to ESG investing, frequent stake sale by the government, steep hit to earnings of oil & gas companies due to COVID and rising NPAs in public sector banks, PSU stocks have tanked up to 48 per cent in last one year even as benchmark indices have been hitting fresh highs. The valuations are quite low, the dividend yield is attractive yet investors are unwilling to put faith in the PSU pack.
"The BSE PSU Index valuation is at 9x P/E and 0.9x P/B; this is 25-30 per cent lower than last-five-year averages," says a JM Financial report dated December 24.
The BSE PSU index is down 16 per cent while BSE-500 index has rallied 16 per cent in the last one year. "The valuation discount to the BSE 500 Index has further expanded to nearly 70 per cent versus 40-50 per cent in FY16. This is despite PSUs' profitability and RoE/RoCE matrix not seeing a similar decline. Hence, the BSE-PSU Index dividend yield continues to be significantly higher at nearly 3.8 per cent while the BSE-500 Index dividend yield has declined to 1.2 per cent," says the JM Financial report.
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The BSE PSU index had hit its 52-week high on January 2 in 2020. Among individual stocks, Punjab National Bank, Canara Bank, Union Bank of India, Bank of Baroda, Coal India, Container Corporation Of India, Bank Of India, Indian Oil Corporation, Oil India and Oil & Natural Gas Corporation have fallen anywhere between 27 per cent and 48 per cent.
"The key reason for the underperformance of the index is that it has high weights in commodities and material stocks, which are yet to recover fully. Also due to the wealth destruction seen in PSU pack over the past few years, investors are wary to take large exposure to them even as the dividend yield is high and valuation ratios are attractive," says Deepak Jasani- Head of Retail Research at HDFC Securities.
The positive triggers
Experts believe as the COVID fears recede the PSU pack will see re-rating while Budget 2021 may also have positive announcements for the sector. Going by latest reports, a committee has been set up to work on a new annual target structure for the management of PSUs from FY22. The management incentives will be linked to the target. "This new target structure might be announced in the upcoming Budget and is likely to focus on improving: a) profitability and the RoE/RoCE matrix; b) market cap; c) frequency and quantum of dividends; and d) sale of non-core asset, amongst others," says JM Financial.
Further, the government is trying to minimise frequent stake sales in PSUs via ETF/OFS as these create an overhang on the share price. "This is being done to boost profitability and valuations ahead of plans for strategic disinvestment of a few PSUs so that the government can get more value from potential stake sales."
Jasani of HDFC Securities believes the PSU index will come back in favour as the Govt has started to recognize the importance of marketcap and is likely to take steps to enhance / protect the market cap of PSUs. "This will help the government in realizing good amount when its stake is divested. Among the largecaps we prefer SBI, HPCL and GAIL."
JM financial has identified preferred PSU stocks in various sectors. Among Oil & Gas PSUs, it prefers GAIL, HPCL and BPCL. It recently upgraded upstream PSUs (ONGC and Oil India) as tactical BUYs on rising crude prices. Among power PSUs, NTPC is its preferred play. "NTPC (our top pick) trades at nearly 50 per cent of its historic multiple (at 0.7x FY22E BV) despite 15 per cent EPS CAGR (FY20-22)."
In the banking space, the brokerage likes State Bank of India. "SBI's liability franchise remains unparalleled (CASA ratio of 45.4 per cent) and recent deposit rate cuts have cushioned NIMs (3.1 per cent, +6bps QoQ) against downward pressures due to excess liquidity. Core bank valuations (at 0.6x FY22E adj. BVPS) are still undemanding and provide an attractive entry point for long-term investors. We maintain BUY with a target price of Rs 300."
Among industrial PSUs, Bharat Electronics (BHE) looks good, which is a key beneficiary of rising defence spends, says JM Financial.