PSU Stocks: Bright Prospects in 2021

There was time when PSU stocks used to be the darling of investors. However, in recent times such is the pessimism around PSU stocks that investors are not willing to touch them even after recognising the fact that these set of stocks are highly undervalued. Deepti Shidore identifies the reasons why investors are cautious of PSU stocks even as she highlights the fact that some of the renowned PSUs are trading at their decadal lows and trading at mouth-watering discounts

•Top PSU companies held by mutual funds include NTPC, BPCL, Power Grid, Coal India, ONGC, IOC, BEL, HPCL, GAIL India and PFC. 

•Top PSU companies held by FPIs include Power Grid, NTPC, BPCL, Coal India, ONGC, GAIL India, IOC, Container Corporation, HPCL and REC.

•PSU stocks have been under pressure and have witnessed significant price erosion since the corona virus outbreak.


   

PSUs stocks are an important component of the Indian equity markets. Not only are the set of PSU stocks significant the perspective of market value but also from an economic standpoint. The PSU companies’ performance is a mirror of the Indian economy. And since some of the PSU companies operate in sectors that are important to the Indian economy it becomes important for investors to keep track of their performances. That said, for the return-minded investors PSU stocks have been disappointing yet again in 2020.

The Nifty PSE index is down by 12.26 per cent in 2020 while Nifty PSU Bank index is down by 32.75 per cent as on December 25, 2020. The only other sectoral indices that have been in the red in 2020 are Nifty Media index and Nifty Bank index, down by 8.85 per cent and 5.82 per cent, respectively. Nifty meanwhile is up by nearly 12 per cent in 2020. The huge underperformance in 2020 has irked several investors as the underperformance in PSU stocks has been consistent.

With such heavy underperformance and stocks trading at decadal lows, the set of PSU stocks suddenly are looking attractive from a long-term perspective. Opines Gaurav Sharma, an active investor: “There are several PSU stocks that are at their 10-year lows that look attractive from a long term investment perspective. Stocks like NTPC, SAIL, Coal India, ONGC, etc. are at multi-year lows and it’s not as if these companies are going to go bust. These set of companies are struggling for growth; however, they are cash-rich companies with good balance-sheets. Several such PSUs are available at deep value and are trading below their intrinsic values. Some of the PSU players are sector leaders and are fundamentally strong. Positive sentiment in the markets, ample liquidity, low interest rate environment, corporate actions such as buy-back and dividends along with divestments make PSUs an attractive bet for 2021.”

Defining Public Sector Undertakings Public sector undertakings (PSUs) are closely linked to the important sectors of the economy and have successfully built a strong industrial base in India. These companies are majorly owned by the government. PSUs are operational in core sectors of the country, namely, finance, coal, capital goods, infrastructure, oil, power, metals and mining. The total market capitalisation of all the PSUs is more than Rs 10 lakh crore. 

"The share of PSUs in total market capitalisation has slipped from 18 per cent to 8 per cent."
 - Prashant Jain, Executive Director and CIO, HDFC MF

Several reforms for PSUs have been announced by Union Finance Minister Nirmala Sitharaman which will lead to large scale consolidation and divestment of these PSUs. The new PSU policy is likely to focus on privatising PSUs in non-strategic sectors based on feasibility.

Are PSU Stocks Undervalued?

On various parameters compared to private players, the PSUs do trade at a discount. For any stock to fetch premium valuation ‘growth in earnings’ is the key. As the growth component is missing when it comes to several PSUs the valuations are almost always depressed for these set of stocks. However, the current pandemic-led sell-off in 2020 has pushed the PSU stocks to much lower levels, making them attractive from a long-term investment point of view. As the prices have corrected more than the broader markets, the dividend yield has become relatively attractive.

Even though the PSU stocks are relatively undervalued as compared to their peers in the similar industry, one of the main reasons why investors do not bet on PSU stocks is the constant supply of equities in the market by the government. Whenever the government falls short in its tax collections, it has a tendency to divest its stakes from some of the leading PSUs and that maintains pressure on the PSU stock prices year after year. If we look at the Nifty PSE index performance, in one year the index is down by more than 12 per cent but in the past three months the index has been participating in the market rally with several major PSU stocks staging a comeback. Government policy decisions and renewed focused in divestment of leading PSUs are factors that have attracted investors to such companies.

 

Conclusion

As an investor it would not be wise to ignore the opportunities offered by PSU stocks, especially when the stocks prices are at multi-year lows and when the stocks are trading at deep discounts as compared to their peers. PSU stocks do face several headwinds and hence they are presently trading at a discount of nearly 20 to 30 per cent to its peers. That said, those PSUs which are cash-rich and have monopolistic market share can be looked at positively. The dividend yield is high and can be attractive; however, investors should not get carried away with the high dividend yields of PSUs as a substantial portion of the PAT is distributed by PSUs as dividends and such an action kills growth.

Dividend growth along with earnings growth is what will make a good investment. Focus can also remain on those PSU stocks which are gaining market share. State Bank of India (SBI), for example, is the only PSU bank which has been able to gain market share in the past five years and is trading at a discount to its private bank peers. The average PE for leading ‘navratnas’ has come down to attractive levels in spite of robust earnings’ outlook. The combination of depressed valuations and high dividend yields offer some opportunities as we head into 2021. PSU stocks like GAIL, HUDCO, NBCC, ONGC, SAIL and NTPC have great earning visibility going ahead and may be re-rated as we enter 2021.

These stocks are also some of the favourite PSU stocks of FPIs and DIIs along with Power Grid which is owned by FPIs in large measure. While the valuations are attractive and the stock prices are depressed, as an investor one cannot simply buy a PSU stocks and forget them forever. Periodic monitoring is required as the budget plans, fiscal deficits, government policies and government divestment plans are key events which influence the fortunes of these PSU stocks. Government decisions and announcements tend to impact the stocks’ performance and hence it is important that PSU stock investors keep a tab of government announcements pertaining to their holdings.

Investors should consider all these aspects before taking exposure to PSU stocks. It will be a mistake to take exposure to PSU stocks assuming that this set of stocks will emerge as ‘compounders’ wherein they will deliver a CAGR growth of let’s say 20-25 per cent. PSU stocks as of now are looking attractive and at best a tactical portfolio allocation can be made to these companies. Not more than 10 per cent allocation to the PSU set of stocks in the overall portfolio is advisable.