Great bargains on Dalal Street, too; PSUs shining

Mumbai: It was a drab, dull and dim pocket in the gleaming marketplace for a decade, but the Air India sale appears to have scripted a Cinderella-like makeover story for stodgy state-run companies.

PSU stocks are headed for a re-rating as a cohort - and in a tearing hurry - after they gained Rs 5.6 lakh crore in market-cap this year, up 52%. That compares with a 32% rise in the Nifty. And most of the stellar gains have come lately.

Listed state-owned firms excluding banks have gained nearly Rs 2 lakh crore in market capitalisation in the last one month. Yet, despite a sharp rally, many of the PSUs are still undervalued compared with their private-sector peers, offering great value.

"The conclusion of Air India's divestment, expectations of a slowdown in the government stake sale through the ETF route and improved prospects of PSU divestment generated huge interest," said Binod Modi, head of strategy at Reliance Securities.

"Additionally, high dividend yields, reasonable valuations, and expectations of sustained cash flows attracted long-term value investors," he said.

PSU stocks did well in the first decade of the millennium but became wealth destroyers in the next due to frequent stake sales by the government, exits by ESG-focused foreign funds and a substantial hit to earnings for oil & gas PSUs due to the sharp fall in crude prices and gross refinery margins.

There is a disconnect between earnings growth on one hand and market-cap reduction on the other, according to analysts.

"There are three near-term triggers to support price expansion in the PSU space - unlocking of value through disinvestment, several mispriced and undervalued opportunities, and benefits from high raw material prices," said Shiv Chanani, head of research, Elara Securities. "Given that most PSUs operate in commodity-heavy segments like energy (ONGC, OMC, and gas companies), metals (SAIL and NALCO), they stand to benefit from commodity price rise, and we see them as good tactical buys."

The NSE PSE index has rallied 16% last month compared with a 5% gain in the Nifty. Stocks such as IRCTC, NLC India, PTC India, BHEL, Nalco, and NHPC have surged between 30% and 50%. Heavyweights such as NTPC, Coal India, Oil India, and HPCL have rallied 20% each.

Analysts believe most of the tailwinds are likely to remain for some time.

"Compared with their private-sector counterparts, PSUs in all segments are attractively valued. Even in this bull market, many PSUs like BPCL, IOC, and Coal India are valued at low PEs of 6.2, 5.8, and 8.3, respectively, when the Nifty PE is around 29," said VK Vijayakumar, chief investment strategist, Geojit financial services.

"But when the present exuberant bullish trend reverses, PSUs may come under selling pressure, and therefore, investors have to be selective in choosing PSU stocks."