After lagging the broader market for four consecutive years, stocks of public sector undertakings (PSU) are on a comeback trail.
So far this year, the PSU Index has jumped 23.3 per cent, outpacing the 5.5 per cent advance clocked by the S&P BSE Sensex index. In the process, investor wealth in PSU stocks has grown by over ₹4-lakh crore in this period.
Soon after crashing with the rest of the market in March 2020 on Covid impact fears, PSU stocks, in step with private sector enterprises, rebounded last year but failed to out-perform the market. The S&P BSE PSU index, a gauge measuring the performance of 60 PSU stocks, gained 41 per cent from March to December last year in comparison to the Sensex’s 84 per cent surge. However, the pace of rise in the government-owned firms has been much faster in 2021 so far.
In less than three months in 2021, the top-performing PSU stocks have given between 60 and 120 per cent gains, with Hindustan Copper (122 per cent), NBCC (78 per cent), MMTC (74 per cent), Bank of Maharashtra (70 per cent) and Bank of India (64 per cent) leading the charge. Others such as Concor, Shipping Corporation, IRCTC, HAL, and BEL have given between 30 and 60 per cent gains.
The preference for PSU stocks is evident when comparing their YTD returns to private-sector counterparts in similar businesses. Stocks of most PSU banks have given between 24 and 70 per cent returns in 2021 so far, against 10-20 per cent by top private-sector lenders such as IndusInd, Axis, ICICI and HDFC. PSU electrical equipment maker BHEL has beaten peers such as Thermax.
Among the PSU index constituents, 94 per cent (56 out of 60 stocks) have generated positive returns in the year to date period compared with 76 per cent (22 out of 30 stocks) for the 30-scrip Sensex. Four PSUs in the Sensex — SBI (up 44 per cent), ONGC (up 21 per cent), PowerGrid (up 19 per cent) and NTPC (up 12 per cent) — are the most valuable government-owned firms in terms of market capitalisation.
Why PSUs ?
With the broader markets having run up quite a lot in the past one year, PSUs are increasingly becoming the hunting ground for those seeking relative value. From the lows of March 2020, the Sensex trailing Price to Earnings (PE) ratio has gone up from 20 times to 35 times today. But the PSU index PE ratio, even after the up move in the last few months, is at only 13 times (trailing) today, from 8 times earlier.
At the beginning of 2021, the bluechip Sensex had a PE ratio of 33 times compared to the inexpensive 11 times PE valuation for the PSU index. This valuation gap is narrowing as investors turn their attention towards PSUs, which not only enjoy implicit sovereign backing but offer much higher dividend yields.
The rush for PSU stocks can also be partly attributed to investors getting clarity on the government’s privatisation roadmap and the disinvestment agenda. Also, talk of monetising land banks of government-owned entities has given a leg-up to PSU stock valuations. Such tailwinds have helped the PSU theme become the second-best performer so far in 2021, after infrastructure.