Government’s shift towards value maximisation may boost PSU stocks, says Jefferies;NTPC, SBI, Coal India among top picks

Public sector undertakings (PSU) stock rerating persists and is ongoing, according to global brokerage house, Jefferies. If the government were to shift its position in favour of "value maximisation" for state-owned enterprises (SOEs), it may surpass average, believes the brokerage.

The index continues to trade at a 40% discount to the Nifty, which has a 15% potential for return to average. Three of Jefferies' best PSU picks are NTPC, State Bank of India (SBI), and Coal India.

After underperforming the Nifty by 10 percentage points previous to 2020, the PSU index has outperformed it by 70 points over the last 12 months. Improvements in return on equity (RoE) and profits per share (EPS) have contributed to the recent outperformance.

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In the February 2024 budget and the Ministry of Finance officials' comments that followed, the government openly discussed a shift in policy in favour of PSU value maximisation. Over the past five years, there has been a noticeable movement in this area as the government has moved away from the ETF style of disinvesting PSU shares. 

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The government currently views PSU monetisation as a mix of asset monetisation, stake sales, and dividends. Stock performance is becoming a factor in PSU top management performance as well. The brokerage emphasised that longer term rerating for SOEs might be driven by improvements in governance.

PSU stocks have gained momentum due in part to the government's increased capital expenditures, but industry-specific factors have also played a role. Despite the lack of PSU index valuations before 2012, the brokerage's analysis of valuations indicates that PSU Banks, some oil and infrastructural companies, and power and coal utilities had substantially higher multiples between 2006 and 2012.

"PSU RoEs had dipped from 14-15% level to 4-6% primarily due to the drag from PSU banks among others. The overall RoEs have improved back up to 12-13% as the profitability has recovered and should improve further. Most PSUs have also seen large EPS upgrades with notable exceptions being ONGC, Concor and BHEL," Jefferies said.

Furthermore, according to Jefferies, NTPC (Buy) is still its top choice since its predicted EPS growth of 10-12% is greater than Power Grid's (Buy) single-digit EPS growth. Nonetheless, based on the 2006–12 example, both possess more rerating potential. As a supplier of coal to thermal plants, Coal India could also gain significantly from the anticipated increase in thermal capacity.

"India has ample coal reserves, but the mining activity needs a step-up to meet the demand. Last 3 years volume growth was c.10% CAGR. If this is repeated over the next 2, it would be a positive surprise. The stock still looks cheap at 8.3x Mar'25E PE and 6% dividend yield," the brokerage said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.