Global trading company Jefferies claims that the stock rerating of public sector undertakings (PSUs) is still present and continues. The brokerage believes that if the government were to change its stance in favor of "value maximization" for state-owned companies (SOEs), it might exceed average.
The Nifty, which has a 15% potential return to average, is currently trading at a 40% premium to the index. State Bank of India (SBI), Coal India, and NTPC are three of Jefferies' top PSU recommendations. The PSU index beat the Nifty by 70 points in the past 12 months after failing it by 10 percentage points before 2020. The recent outperformance has been attributed to improvements in profits per share and return on equity (RoE).
The government openly addressed a change in policy in support of PSU value maximization in the February 2024 budget and the remarks made by Ministry of Finance officials thereafter. There has been a discernible shift in this domain over the last five years as the government has shifted away from disinvesting PSU shares in the manner of an ETF.
PSU monetisation is currently seen by the government as a combination of dividends, equity sales, and asset monetisation. The success of PSU top management is increasingly being influenced on stock performance. The brokerage underlined that enhanced governance may be the driving force for longer-term rerating for State-Owned Enterprises.
The government's increasing capital expenditures have contributed to the rise of PSU stocks, although industry-specific variables have also been important. The brokerage's research of valuations shows that PSU Banks, certain oil and infrastructure businesses, and power and coal utilities had significantly higher multiples between 2006 and 2012, despite the absence of PSU index valuations prior to 2012.
Jefferies signifies, "Among other factors, the drain from PSU banks was the main reason why PSU RoEs had dropped from a level of 14–15% to 4-6%. As the profitability has rebounded and is expected to continue to do so, the total RoEs have improved once more, reaching 12–13%. Large EPS improvements have also been observed by the majority of PSUs; ONGC, Concor, and BHEL being notable outliers.”
Furthermore, given that NTPC's (Buy) projected EPS growth of 10-12% is higher than Power Grid's (Buy) single-digit EPS growth, Jefferies continues to rank NTPC as its top pick. However, considering the 2006–12 case, both have greater rerating potential. Coal India, a provider of coal to thermal plants, stands to earn a great deal from the predicted rise in thermal capacity.
"India has a large amount of coal reserves, but in order to fulfill demand, mining activity needs to increase. Volume growth over the last three years was roughly 10% CAGR. It would be a welcome surprise if this continued for the next two. With a dividend yield of 6% and an 8.3x Mar'25E PE, the company remains inexpensive,” stated the brokerage.
ALSO READ: Abu Dhabi's RuPay Card was Introduced by UAE President and PM Modi
