Are railway, power, and defence PSU stocks still attractive after Budget 2024?

Public Sector Undertaking (PSU) stocks have notably declined following the Union Budget 2024, as the government did not introduce any changes to the previously outlined capital expenditure (capex) plans in the interim budget.

Amid this backdrop, stocks from the defence, power, and railways sectors, which had surged significantly following the interim budget, have experienced a notable correction. 

These stocks saw a decline of up to 10% as market enthusiasm waned. The BSE PSU index, which tracks the performance of 55 public sector companies, hit a four-week low during Wednesday's intraday trading before recovering some losses towards the end of the session. Overall, the index has fallen by 1.10% over the past two sessions.

In light of this heightened volatility, Livemint reached out to experts and market analysts to gain insights into the factors influencing this trend and to understand the potential future trajectory of defence, power, and railways stocks.

With no significant changes to the capital expenditure for railways and defence in the Union Budget, do you expect the rally in PSU stocks to continue?

Anirudh Garg, Partner and Fund Manager at INVAsset, views the government’s steady focus on railways and defence sectors as a favorable development for the market. He emphasised that the government's commitment to long-term infrastructure and defence improvements without any sudden policy shifts might disrupt the current momentum.

Garg also highlighted the government’s ongoing emphasis on modernising and enhancing railway capacity remains crucial. Even without a significant increase in funding, consistent support ensures that existing projects continue smoothly.

Anirudh Garg highlighted that steady funding will benefit railway PSUs, especially with their involvement in electrification, high-speed rail initiatives, and logistics parks. He believes these factors are likely to drive the sector's stocks upward, supported by robust project pipelines and their strategic significance.

Regarding the defence sector, Garg noted that while capital expenditure has not seen a significant increase, the emphasis on self-reliance and indigenisation remains strong. 

This ongoing support is sufficient to sustain both current and future projects, especially under the 'Make in India' initiative. He anticipates that defence PSUs will benefit from continued domestic orders and potential export opportunities, positively impacting their stock performance.

Anil Rego, Founder and Fund Manager at Right Horizons, asserts that India's defence sector is experiencing substantial growth due to rising defence budgets, modernisation initiatives. He said the government is actively bolstering the defence sector through favourable policy reforms, incentives, and initiatives aimed at promoting manufacturing and technological advancement.

Given the rising geopolitical uncertainty, the modernisation program is expected to be prioritised in the coming decade. India’s defence exports rose to USD 3 billion (16x in FY17–24E). This is expected to rise further to USD 6 billion by FY29E. Nearly 2x of defence spending during FY24E–FY30E is expected to continue the growth in the sector.

Despite this, he noted that the initial significant rerating of PSU stocks over the past two to three years has already occurred. Moving forward, he expects further rallies in this segment to likely depend on earnings performance.

Given the government's strong emphasis on increasing capacity, what is your perspective on the near-term prospects for the power PSU stocks?

Anil Rego observed that the renewed thrust on thermal energy positions nuclear energy to play a significant role in India's energy mix. The government plans to collaborate with the private sector to establish Bharat Small Reactors, conduct research and development for Bharat Small Modular Reactors, and develop new nuclear energy technologies. The interim budget's announced R&D funding will be allocated to this sector.

The government will provide fiscal support for setting up a full-scale 800 MW commercial plant using advanced ultra-critical technology. This development is positive for capital goods companies in the solar industry, he said. 

Additionally, the exemption of customs duty on capital goods used in solar cell and module manufacturing, along with the zero BCD on machinery for module manufacturing, is expected to benefit new capacities under the Production Linked Incentive (PLI) scheme, Anil Rego added.

Rego further believes that companies with strong balance sheets and healthy return profiles will perform relatively better, especially when supported by a robust order backlog and pipeline. The government's focus on alternative power sources, such as nuclear and renewable energy, is anticipated to benefit power PSUs that cater to these themes.

Anirudh Garg also highlighted that the power sector is a clear priority for the government, with a strong emphasis on expanding capacity and integrating renewable energy. He noted several key factors contributing to the positive near-term outlook for power PSU stocks, including capacity expansion, policy support, infrastructure development, and financial performance.

Capacity Expansion

The government's push to increase power generation capacity, particularly in renewables, aligns with global sustainability trends. Garg emphasised that power PSUs are well-positioned to benefit from this shift. By aggressively expanding their renewable energy portfolios, these companies can reduce their carbon footprint and create new revenue streams.

Policy Support

The government continues to back renewable energy projects with various incentives and is working to streamline regulatory processes. Additionally, efforts to improve the financial health of state distribution companies (DISCOMs) will enhance cash flow and reduce receivables for power generators, further benefiting power PSUs.

Infrastructure Development

The emphasis on building a robust transmission network and smart grids is another positive development for power PSUs, he said. 

Financial Performance

Garg highlighted that power PSUs have demonstrated stable financial performance, with steady revenue growth and manageable debt levels. This financial stability, combined with government support for capacity enhancement, positions these companies for ongoing growth.

Anirudh Garg finds the near-term prospects for power PSU stocks encouraging. He stated that the combination of government support, a strategic shift towards renewable energy, and infrastructure development efforts should drive growth and boost investor confidence in these stocks.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.