PSU shares rallied up to 999% in the past three years. Will the momentum continue?

Public sector undertakings (PSU) have generated massive returns for investors on Dalal Street in the preceding three years. Mazagon Dock Shipbuilders, with an impressive surge of 999% since January 2021, has emerged as the top performer among PSUs. Other notable gainers in the PSU sector include Rail Vikas Nigam, Indian Railway Finance Corporation, Hindustan Aeronautics, and Bharat Heavy Electricals, all witnessed a surge of over 500 per cent during the same period. In contrast, the benchmark BSE Sensex gained 55% from January 2021 to 2024, while the BSE PSU index witnessed a substantial rise of approximately 200% during this timeframe. Will the ongoing momentum continue in the PSU pack and which sectors will deliver solid return to investors over the next 2-3 years?

In an interaction with Business Today, Anish Tawakley, Deputy CIO-Equity, ICICI Prudential AMC said that PSUs in the past three years have moved from being one of the cheapest segments in the market to a situation where some them looks overvalued. “The phase of easy money in the PSU space is largely behind us. From here, one has to be more discerning about the PSU picks. At ICICI Prudential, we are positive on some of the PSUs within the power sector because not enough capacity is coming up in the power sector for the next two to three years,” Tawakley said.  

He further added that power companies are likely to do well for the next two to three years. Also, power generating companies are still more reasonably valued compared to the other areas. “Another PSU pocket we have been positive on is upstream oil names where the price to earnings even today is reasonable when compared to other PSUs,” the money manager said.

Data further highlighted that PSU players like SJVN and Power Finance Corporation also gained 418% and 408%, respectively, in the past three years. REC, ONGC, Power Grid also gained 402%, 186% and 145%, respectively. In the BSE PSU pack, just BPCL (up 28%) and Gujarat Gas (up 49%) underperformed the Sensex over the past three years.

Infrastructure

While sharing his views on the infrastructure sector, Tawakley thinks that there are multiple drivers for increased infrastructure spending. One key theme is urbanisation. Today 36% of households stay in an urban set up. As this ratio increases, demand for real estate, social infra and other urban infrastructure will also increase. Second, is the increased government focus to augment the road and rail network. And finally, as utilisation levels improve, corporate capex is expected to increase. For example, the power sector is expected to see reasonable capex as utilisation levels have gone up and due to transitioning to cleaner fuels.

Pharma

When it comes to pharma, the fund manager believes that the domestic pharmaceutical market is expected to maintain steady growth of 10-11% driven by favourable demographics, rising income levels, improved research and diagnostics and growth in chronic, lifestyle diseases. As a result, pharma as a sector is likely to do well over the long term. Consequently, pharma funds too could deliver an encouraging investment experience. However, the caveat here is that one has to remain invested with a long-term view. On an average, pharma funds have delivered a 42.62% return to investors in the past 1 year and a 16.97% annualised return in the past three years.

IT funds

Global slowdown, lower IT spending, commodity and wage inflation are putting downward pressure on the IT companies from a near-term perspective, he says while adding that spending by the IT companies is compressing which bodes negatively for the sector. “However, as global companies look for diversified outsourcing, Indian IT companies may stand as major beneficiaries. Add to this, the emergence of disruptive AI technologies is further clouding the near-term outlook. Hence, we are underweight in the sector,” Tawakley said. According to Value Research, Technology stocks delivered an average return of 30.51% in the last one year.

Banking

Tawakley believes that banking is the only sector where valuations have not gone up over the past decade. “Most other sectors in this period registered a rise in valuation by 30% to 40%. So, from that point of view, valuations of the banks or financials continue to be attractive. However, last year marked the peak of net interest margins, low non-performing loan cycle and high credit growth,” he said.

What’s next?

The market watcher expects a cyclical upswing in the economy. He prefers domestic cyclical sectors which are expected to see a significant swing in a recovery. These include industrial and capital goods, cement, automobiles, insurance and asset management companies. “We are relatively cautious about FMCG and IT. We are underweight banks as the competitive intensity in the sector is very high,” he said.

 

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