PSU stocks look like deep value betting, but that may not be enough

In 2020, when many other sectors have already rallied and are trading at expensive valuations, PSU stocks look attractive in terms of relative valuations, some analysts pointed out. There was a slight catch-up rally in PSU shares. The Nifty PSE index has risen about 26% since late October. Nevertheless, the index has fared significantly worse than the broader markets so far this year. In 2020, the Nifty PSE index is down 11% compared to the nearly 13% increase in the Nifty 50 index.

“The BSE PSU index is still trading at 7.8 times PE, compared to 10 times the average for the past 10 years,” said analysts at Jefferies India Pvt. Ltd in a report on December 17th. PE stands for Price-to-Price Profit Ratio: “The current PE discount of 64% on the Nifty is still significantly higher than the average discount of 36%, and the continuation of the value can drive PSU shares higher” said the brokerage firm.

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Lag in development

Jefferies data shows the 64% discount is close to the highest for the index. The discount has increased gradually since 2018.

The lower discount looks compelling, but that doesn’t mean the outlook is good for all PSU stocks. “Our preferred PSU stocks are State Bank of India Ltd., Container Corp. of India Ltd. (Concor), NTPC Ltd., Hindustan Petroleum Corp. Ltd. and Bharat Electronics Ltd.,” said the analysts from Jefferies.

In general, PSU stocks come with certain particular risks. As mentioned earlier, the sale of government shares was a significant overhang as the supply of stocks increased. “In addition, investors always feel that the government could bring about some changes to the rules,” said an analyst, who asked for anonymity. Concor’s sudden change in terms of the base license fee that will weigh on its profits is a recent example.

There are other factors that affect stocks as well. “Power Grid Corp. of India Ltd. has a high ESG (Environment, Social and Governance) rating, but the current market price offers limited benefits,” said analysts at JM Financial Institutional Securities Ltd. in a report on December 4th. For Coal India Ltd. The risk of a stake sale (66% government stake) and lower ESG ratings remain, while Bharat Heavy Electricals Ltd is structurally weak due to low demand for boiler turbine generators (BTG), the brokerage firm said prices mean the picture for Oil and Natural Gas Corp. Ltd and Oil India Ltd is no good.

Given these factors, investors need to carefully place their bets on PSU stocks despite lower valuations.

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