Create Wealth With PSU Stocks

PSU stocks have now been showing signs of outperformance after several years of lacklustre performance with some exceptions. Yogesh Supekar explores the prsent trend and developments in the space. The DSIJ Research Team recommends its top picks in the PSU space.



The markets seem to be in no mood to reward investors who are unable to read the present trend accurately. Actually, they broadly never do. Understanding market trends has always been crucial when it comes to creating sustainable and consistent wealth from the markets. Experienced investors who have been active in the market for long will tend to conclude that markets move in themes. Different themes and sectors outperform in different market conditions.

It becomes essential that the underlying themes are ‘well understood’, and most importantly, ‘grasped timely’ by the investors to outperform market returns. PSU stocks as a theme seem to be promising currently in a seemingly wobbly broader market scenario. The recent rally in PSU stocks is heartening for investors as these stocks as a group has been disappointing investors for quite a long time. The below table highlights the underperformance of the NSE PSE index vis a vis the Nifty over the past one year. 

The underperformance of the PSU stocks goes far beyond the past one-year period. The past 5-year returns of the S&P BSE PSU TRI index are flat, ie a meagre 0.07 per cent on an annualised basis. The returns over the past 3-year period (annualised) have been actually negative (-0.32 per cent)/flat while over the past one-year period, the index has generated a 4.94 per cent return. The Sensex returns over these time frames have been far superior. If one were to take the mutual fund route to PSU stocks, the performance still is not impressive. The below table highlights the relative performance of the SBI PSU Fund, the Sensex, and the S&P BSE PSU Index, which clearly reflects the stark underperformance of the fund to the indices over the past 3 and 5 year time frames.

On a YTD basis, the average returns for all the listed PSU stocks basket is around -17 per cent even as the average return for listed stocks with market capitalisation greater than Rs.1,000 crore is -4 per cent. However, if we consider the performance of all the listed PSU stocks for the past one month, the average return is an impressive 12 per cent while that for listed stocks with market cap greater than Rs.1,000 crore is 6 per cent. This reflects clear momentum in PSU stocks. Says Abhishek Runwal, “I am bullish on PSU stocks as I am betting on the divestment mood in the country. It is going to be something huge in my view and I can see that some of the PSU stocks can take a flight from their current levels”.

Indeed, most of the PSU stocks are looking attractive in terms of valuations and when one factors in the prospects of divestments, the PSU story looks even more lucrative. Following are the stocks in the PSU category showing some momentum and trading close to their respective 52-week highs.




Why Privatisation of PSUs is a big thing

The government’s intention to privatise leading PSUs is a major policy shift and can create huge opportunities for investors. Until now, successive governments in the past have been emphasising on divesting PSUs and have also initiated some divestments. But now we are talking about privatisation of some mega PSUs, which can have ramifications on the broader economy's performance.

What this essentially means is that the government’s equity in PSUs which actually is the capital invested by India’s taxpayers, has a better chance to maximise its value. As a nation we have been long following a short term approach to fiscal deficit management by selling stakes in PSUs (raising capital) whenever required. This approach linked to budgetary revenue target has been frustratingly inefficient over the years.

Investors are naturally excited established PSU businesses will draw the required capital, thus creating a possibility of a win-win situation for both, the government and the investors, and yes, ultimately for the tax payer. The most important thing to observe will be how efficient the whole privatisation process pans out to be and who will ultimately be in charge of the newly privatised company. It will be a futile exercise if the government were to retain majority stake, say 51 per cent of the entity, and the remaining portion is sold off to investors at large and the control continues to rest with the government, which fails to deviate from the same old management and management control style. In such a case, the whole exercise of privatisation may not fulfil the larger objective of maximising the value.

Investors will have to identify as to who is in control of the company and most importantly who is managing it as in the long term it would be essential that a good Management takes charge of the business and create value for its investors. Thus, privatisation will fill in the management gaps, unleash capital, and facilitate wealth creation opportunities for investors, assuming the control is with the right management team, immaterial of the ownership.

PSU Stocks with momentum

The below table highlights those PSU stocks that are trading at attractive valuations. Most of the PSU stocks in the list below are fundamentally sound, however are trading below their 200 DMAs (Days Moving Average) indicating them depicting a weak trend. Only two stocks i.e Hindustan Aeronautics and Cochin Shipyard are trading above their 200 DMA indicating positive momentum in them. This goes to suggest that in spite of the recent rally in PSU stocks there are multiple stocks in the PSU space which are inexpensive.

PSU Banks

With most PSU banks returning to profitability for the first time in Q1FY20 after 10 consecutive quarters of losses since Q3FY17, the stock price bullishness in the beleaguered PSU bank space is cheering up investors who are were getting apprehensive on the prospects of these stocks. The total losses before taxes for PSBs stood close at Rs.1.15 lakh crore in FY19.

Inspite of the recovery in profits, the return on assets (RoA) is expected to remain low in FY20 as fresh bad loans keep piling and provisioning continues. Due to higher provisioning, higher operating profits are not expected to get translated into higher net profits for PSBs.

The asset quality worsened with fresh slippages for both PSBs and private banks on a sequential basis. However, PSBs accounted for nearly 73 per cent of the total slippage. The micro, small and medium enterprises (MSME) segment saw an increase in slippages. 

Among the constituents of the Nifty PSU Bank index, almost 91.66 per cent stocks are trading below their 200-DMA and the index itself is trading below its 200-DMA by 13.36 per cent.

**data as on November 15,2019 

Manav Chopra CMT,
Head Research - Equity, Indiabulls Ventures Ltd

The Nifty PSU bank index is forming a probable bullish Head & Shoulder pattern and its neckline around the 2590-2600 levels. The index on the monthly charts indicates limited downside as it has formed a strong support around 2350-2300 levels on the downside. The RSI has formed a bullish divergence which indicates an impending trend reversal on the anvil and would confirm a trend reversal once prices break above the 2600 resistance levels and expect an upside of 15-20%. There has been an emergence of long lower shadow near the support zone which indicates a bullish demand zone and indicates limited downside from the current levels.

SBI and Bank of Baroda have shown early signs of reversal as the prices have breached key short term averages and the trendline has confirmed a reversal. SBI has exceeded its previous month's high and is in a strong momentum, which indicates a bullish bias for the bank and is likely to retest the recent highs of 350-360 levels. The current scenario for Bank of Baroda indicates a bounce from oversold levels and a decisive break above the 100 mark would result in mean reversion towards the 120-125 levels. 


Inflation and interest rates ! 

"Consumer inflation is set to climb further beyond 5.0% in the near term with lower crop production in the just concluded kharif season and the expected impact of the monetary transmission on core inflation. The CPI inflation rate has sharply increased to 4.61% in October 2019 as compared to 3.99% in September 2019 and 3.38% in October 2018. Acuité believes that non-core inflation (food and fuel) is moving in a cyclical trend and is expected to accelerate in H2 FY20. In its opinion, this may lead to a pause in the accommodative monetary policy of RBI and lessen the possibility of a further cut in interest rates."

Acuité Ratings & Research 

"Expectations of another rate cut by the central bank have grown as economic data continues to point at weakening growth momentum. So far, the government's room to manoeuvre is limited given the surge in inflation, while stretched balance sheets of banks and corporates and tight credit conditions limit policy transmission. We expect that a weak GDP print would likely push the central bank to deliver further monetary easing"

Magdalene Teo
Head of Fixed Income Research, Bank Julius Baer & Co. Ltd


Conclusion :

The momentum definitely is there in favour of PSU stocks. There is very good probability that the PSU stocks gets re-rated owing to the privatisation initiative undertaken by the government. The positive momentum was seen as soon as the government announced that it will be divesting stakes in sector leaders such as BPCL and Concor.

The reversal in trend was visible when we witnessed NSE PSE index gain by nearly 9 per cent since September this year. Even when a few of the stocks gained between 15 per cent to 40 per cent in past couple of months in the PSU space, several of these stocks are still trading below their five-year average price to book values, indicating attractive valuations. The depressed valuation is what should excite long term investors with the big bang privatisation initiatives expected to be announced soon.

The market consensus is bullish after a long time on PSU stocks and it will be wise to focus on quality names within the PSU space enjoying higher ROCEs and lower leverage while enjoying higher and consistent profit margins. Those PSUs with higher free cash flows could be researched further for investments.

PSBs may face higher slippages in FY20 as incremental stress continues to emerge from various sectors amidst slowing economic growth. 

Mishra Dhatu​ Nigam 

BSE CODE 541195
Face Value Rs.10
CMP Rs.171.45
Market Cap F F (Cr.) 842.9 

Here is why 

Robust financial performance
Strong order book
Growth driving expansion strategies 

Mishra Dhatu Nigam Ltd. (MDNL) is an Indian company which was first incorporated as a private limited company in November 1973 but later was converted into a public limited company in November 2017. The company is engaged in manufacturing, development and supply of critical alloys and products. Its products include super alloys, titanium and titanium alloys, special steel, electrical and electronic alloys, etc. MDNL is the only manufacturer of titanium alloys in India. The company is a strategic material partner to the Indian defence, space and power sectors.

Looking at the quarterly trends on standalone basis, the total income of the company from operations rose by 47.79 per cent to Rs.170.21 crore in the second quarter of FY20 from Rs.115.17 crore in same quarter of FY19. The EBITDA grew by 52 per cent to Rs.52.91 crore in second quarter of FY20 from Rs.34.81 crore reported in same period of FY19. EBITDA margin stood at 31.08 per cent for the quarter ended September 2019 as against 30.22 percent posted for the quarter ended September 2018. Net profit climbed 74.53 per cent to Rs.35.85 crore in the second quarter of FY20 from Rs.20.54 crore gained in the same period of previous fiscal year.

Comparing the annual trends of FY18 and FY19, the total standalone income from operations rose by 6.72 per cent to Rs.710.84 crore for the year ended March 31, 2019 from Rs.666.07 crore posted in previous year. The EBITDA declined by 3.75 per cent to Rs.183.71 crore for FY19 from Rs.190.87 crore reported in the previous year. EBITDA margin stood at 25.84 per cent in FY19 as against 28.65 per cent posted for FY18. Net profit of the company declined by 0.5 per cent to Rs.130.55 crore in FY19 from Rs.131.26 crore gain in previous year.

On expansion front, the commercial production of Vehicle and Personnel Armouring products at the company’s plant in Rohtak is likely to commence by the end of FY20. The company identified new areas of revenue in the areas of Armouring. It successfully completed first commercial Bullet Proof Vehicles order and handed over 15 Bullet Proof Vehicles to the Central Armed Police Forces (CAPF) in the month of March 2019. In August 2019, MDNL entered into a Joint Venture with NALCO. The purpose of which is to establish an Aluminum Alloy Manufacturing plant in Andhra Pradesh under the ‘Make in India’ approach of Government of India. This plant will engage in manufacturing of high end aluminum alloy products such as sheets, plates, extrusions, forgings, etc.

The company’s manufacturing facility of Helical Compression Springs is being set up at the existing plant located in Hyderabad. This facility will cater to various requirements of Indian Railways, Metro Coaches and Earth-Moving Equipment to name a few. The government’s initiatives for Smart City projects will pose as a growth driver for the company’s manufacturing facility. MDNL seeks to strengthen its existing product categories and to also enter new sectors such as oil and gas, mining, fertilizers, etc. for creating new levers of growth.


State Bank of India

BSE CODE 500112
Face Value Rs.1
CMP Rs.325.20
Market Cap F F (Cr.) 125220.33 

Here is why 

Strong operating performance
Developing new digital services
Operational stability 

State Bank of India (SBI) is a state-owned banking and financial services company in India. The bank operates its business in four different segments, which are named as Treasury which includes investment portfolio and trading in foreign exchange contracts and derivative contracts; Corporate Banking which comprises of lending activities of corporate accounts group, mid corporate accounts group and stressed assets management group; the Retail Banking segment consists of branches in National Banking Group which primarily includes personal banking activities including lending activities to corporate customers having banking relations with branches in the National Banking Group. On branch networking front, SBI holds over 16,000 branches in India as well as out of India. SBI has its presence in 36 counties with around 190 offices.

On the financial front on consolidated basis, the net interest earned by the bank in the second quarter of FY20 came in at Rs.67356.24 crore as against Rs.61426.85 crore in the corresponding quarter of the previous fiscal year, clocking a growth of 9.65 per cent. The total income in Q2FY20 was Rs.89347.91 crore, an increase of 12.67 per cent from Rs.79302.22 crore in Q2FY19. The profit after tax increased significantly to reach Rs.3645.83 crore in Q2FY20 as against Rs.751.58 crore in Q2FY19. For Q2FY20 the GNPA percentage was 7.19 per cent as compared to 9.95 per cent in Q2FY19. The CRAR ratio in Q2FY20 was 13.59 per cent and in Q2FY19 it was 12.61 per cent.

On the annual front, the net interest earned by the bank in FY19 came in at Rs.253322.14 crore, a decrease of 10.64 per cent from Rs.228.970.28 crore in FY18. The total income earned by the bank in FY19 was Rs.330220.88 crore, an increase of 6.04 per cent from Rs.301491.46 crore earned in the previous fiscal year. The bank declared a net profit of Rs.3069.07 crore in FY19 as against a net loss of `4187.41 crore gained in FY18. The company reported GNPA ratio for FY19 to be 7.53 per cent and 10.91 per cent for FY18. The CRAR ratio for FY19 was 12.72 per cent and in FY18 it was 12.60 per cent.

For Q2FY20, the credit portfolio has seen substantial improvement with exposure to BBB & lower book dropping sharply to 21 per cent from 40.5 per cent reported in Q4FY18. The portfolio yield has improved leading to better NIMs.

With digitalisation into focus, the bank has been developing and expanding YONO app services used for lifestyle and banking services. SBI continues to benefit from its subsidiaries as well. With a sturdy domestic business, the bank is has a very large footprint in international operations for serving clients that are increasingly becoming global. With an array of industry leading and synergetic businesses within its portfolio of subsidiaries, the bank has a strong stable market share which continues to attract more customers. With YONO, the bank continues to set new benchmarks for product accessibility and customer convenience. Through modernisation and advancement from the appropriate and timely use of technology the consumers loyalty towards the bank increases. With the proposed listing of SBI Cards & Payments Ltd. value unlocking momentum has begun.