Jefferies says PSU index still at 40% discount to Nifty, names top 3 stock picks

Even as the PSU index has seen a 70 percentage points outperformance over the NSE Nifty in the last one year, the index still trades at a 40 per cent discount to the NSE barometer. This, Jefferies said, offers 15 per cent rerating potential to the average level. The PSU rally has come after a decade of underperformance prior to 2020, and is led by EPS upgrades and return on equity  (ROE) improvement, Jefferies said.

Jefferies said stocks across the PSU spectrum have rallied, partly supported by the Modi government's accelerated capex spends but also due to sector specific reasons.  The foreign brokerage has State Bank of India (SBI), Coal India Ltd and NTPC Ltd as its three top PSU picks.

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"Despite this outperformance, the PSU Index PE at 12.1 times is 40 per ecnt discount to Nifty versus the pre-FY18 discount to Nifty PE of 31 per cent on average. Though PSU index valuations prior to 2012 are not available, our check of valuations suggests that PSU banks, power/ coal utilities and select oil & infra cos multiples over 2006-12 were significantly higher,' Jefferies said.

The return on equity (ROE) of PSUs had dipped from 14-15 per cent level to 4-6 per cent primarily due to the drag from PSU banks among others. The overall RoEs have improved back up to 12-13 per cent as the profitability has recovered and should improve further. Most PSUs have also seen large EPS upgrades with notable exceptions being ONGC, Concor and BHEL, Jefferies said.

In the February 2024 budget and subsequent commentaries from Ministry of Finance official, the government has publicly talked of a positive change of stance towards value maximisation for the PSUS.

"A change has already been seen here over last 5-years, with the government shifting away from the ETF mode of PSU stock disinvestment. Jefferies said the government now sees monetisation of PSUs as a combination of dividends stake sales and asset monetisation.

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