Top Picks: From SBI to HPCL, Motilal Oswal highlights six state-run firms to bet on
Top Picks: From SBI to HPCL, Motilal Oswal highlights six state-run firms to bet on
After a decade of underperformance, the Indian public sector undertakings (PSUs) have made a comeback and reported a strong revival in their profits in the previous five years. They have marked the financial year 2024 as the year of outperformance. This was evident in the sharp run-up of PSU companies and their index outperformance, compared to the Nifty-50 in the previous year.
The PSU index has surged 113% since December 2022.
As FY24 came to an end, domestic brokerage firm Motilal Oswal is revisiting its findings on Indian PSUs.
Motilal in its note said the profitability of PSUs is likely to improve notably across domestic and global cyclicals, with a sharp turnaround in the fortunes of PSU banks driving the overall trend.
It said that higher commodity prices over the last two years have strengthened the profit and loss and balance sheets of metals and oil and gas PSUs. The government's emphasis on localisation, increased capex, and ‘Make-in-India’ in the defense sector has catalysed the improvement in the fortunes of industrial PSUs.
Hence, the brokerage expects the recovery in PSUs' contribution to earnings and market capitalisation to continue.
Given the continued earnings momentum and guidance, Motilal said that the valuation premiums for PSUs are expected to sustain in the near term.
The brokerage's preferred PSU ideas include SBI, Coal India, GAIL, HPCL, and Bank of Baroda.
Around two-thirds of the listed PSU companies have clocked 5-7 years of positive returns since FY14, the brokerage noted.
The positive breadth improved and stood at 95% in FY24, after a weakened trend during FY18-FY20.
Of the top 25 stocks, 13 belong to the BFSI space. Over FY14-24, one stock (IGL) delivered nine years of positive returns. In addition, five stocks (GAIL, Gujarat State Petronet, Petronet LNG, GIC Housing Fin, and Elnet Technologies) delivered eight years of positive returns over the said period.
As many as 52% of the listed PSU stocks have outperformed the BSE PSU index in FY24, with 55 of 110 listed PSUs more than doubled during the year. Notably, only five stocks reported negative returns in FY24.
The market capitalisation share of PSUs in India, which dropped significantly to 10.5% in FY22 from 20.8% in FY14, has since recovered and currently stands at 17.5%.