The PSU rally is likely to continue as stocks still at 40% discount to Nifty50

• As per market watchers, the Public Sector Undertaking (PSU) rally in markets is expected to continue.
• A report by Jefferies states that the PSU index currently trades at a 40% discount to Nifty50.
• State Bank of India, Coal India and NTPC are the top picks from PSUs.

The Public Sector Undertaking (PSU) stocks have been rallying with several seeing a bull run especially in the past three months. Moreover, many have rallied over the past year giving returns of as much as 400% in this period.

Brokerage firm Jefferies believes that there is further upside as PSUs currently have a cheaper valuation compared to benchmark index, the Nifty50. According to a report by the brokerage, the PSU index currently trades at a 40% discount to the index.

Top PSU picks from Jefferies

The government’s stance towards “volume maximisation” for PSUs could further boost the share price of these companies. The brokerage has picked State Bank of India, Cola India and National Thermal Power Corporation (NTPC) as its top picks from the PSUs.

One of the reasons for the rally of these PSU stocks is accelerated capex spending by the government in addition to sector specific reasons.

The overall return on equity (ROE) from PSUs had dipped from 14-15% level to 4-6% due to the performance of PSU banks, which was dragging down the other companies. The overall ROE has again improved to 12-13% amid increased profitability.

“Government now sees monetisation of PSUs as a combination of dividends, stake sales and asset monetization. PSU top management performance also now has a component of stock performance. Governance improvements could drive longer term rerating for these companies,” said Jefferies in its report.

The BSE PSU Index gained 3.42% on Wednesday, after dropping nearly 6% in the prior two trading sessions. The index has surged by 19% this year, compared to Nifty’s decline of 0.1%.

PSU banks may surge further

As per Jefferies, PSU banks have a re-rating potential of 25-30% when comparing the bank’s current valuations with the 2006-12 period when they had similarly strong fundamentals and rising capex cycle.

Oil PSUs rally as government chooses not to cut fuel prices

The government was expected to cut fuel prices due to the upcoming election and a decline in global crude oil prices. However, the government has refrained from doing so and this was reinforced during the interim budget on February 1, 2024 by Finance Minister Nirmala Sitaraman.

“The message was reinforced in the 1st Feb budget which implies it's reasonable to assume avg marketing margins going forward. A potential oil price increase remains the risk,” Jefferies added.

Power companies

Jefferies has added that power companies such as NTPC and Coal India are its preferred picks in the segment. While NTPC has a higher expected EPS growth when compared to its counterpart Power Grid, a planned thermal capacity addition will benefit Coal India.

SEE ALSO:

Vibhor Steel Tubes continues impressive run, subscribed more than 100 times on day two

Poco, OnePlus top Indian smartphone shipment growth but overall reading flat

Using AI to impress someone this Valentine’s? Nearly 50% say they will be offended