Stocks of public sector undertakings (PSU) have had a phenomenal run in the last one year as well as in 2024 YTD (year-to-date) with the Nifty PSE index outperforming the benchmark Nifty in both these time frames. All constituents of the Nifty PSE index were also positive in these time frames.
In the last one year, the Nifty PSE index gave multibagger returns, surging over 112 percent as against an almost 27 percent jump in Nifty. Meanwhile, in 2024 YTD, the Nifty PSE index has risen over 25 percent versus a 4 percent gain in the benchmark.
The recent significant increase in Indian PSU stocks, with returns as high as 300 percent within a year, is driven by a surge in government-led infrastructure investments, which has boosted demand for PSU goods and services. Additionally, expectations of political stability, particularly with a potential BJP victory in upcoming elections, have increased investor confidence in pro-business policies, further fueling optimism and investments in PSUs.
Read here: Coal India vs NTPC: Which PSU stock should you pick for long-term investing?
Market experts are predicting a potential selective correction for PSUs in the short term, depending on their performance in the fourth quarter. However, due to ongoing capital expenditure projects and solid growth strategies, coupled with a consistent influx of orders and the expectation of a stable government, experts believe the rally in PSU stocks will persist after the elections.
Constituents
In the last 1 year, REC was the top performer, surging 266 percent followed by BHEL and PFC, up 257 percent and 211 percent, respectively. HAL, OIL, BEL, NALCO, IOC, NTPC, SAIL, andNHPC also gave multibagger returns up between 103 percent and 181 percent each.
Meanwhile, in 2024 YTD, Oil India was the top gainer, rallying over 66 percent followed by NALCO, BHEL, HAL, and NHPC also rose over 40 percent each. Moreover, ONGC, SAIL, BPCL, IOC, BEL, GAIL, PowerGrid, HPCL, andCoal India also advanced over 20 percent each.
Read here: Why Samir Arora of Helios Capital is betting on travel and PSU stocks
After this exceptional performance by PSUs in the recent past, will the rally continue going ahead, or is there some correction in the short term? Here's what experts say:
Anirudh Garg, Partner and Fund Manager at Invasset
The recent rally in the PSU index, particularly in sectors like Defense, Railways, and PSU Banks, can be attributed to several key factors. One significant driver is the concept of an "old economy run." During such periods, sectors that benefit from increased capital expenditure (Capex) and are sensitive to interest rate changes tend to perform well. In the context of PSU stocks, which often have strong ties to government spending and policies, this rally reflects renewed optimism around government-led investments and infrastructure development.
The Defense sector, in particular, has seen increased attention and investment due to geopolitical tensions and the government's focus on enhancing national security. Similarly, the Railways sector has been bolstered by ongoing projects and modernization efforts, which have boosted investor confidence. As for PSU Banks, their rally can be linked to improving economic conditions and decreasing non-performing assets (NPAs), which have strengthened their financial outlook. Looking ahead to potential corrections, we are cautious about the midcap space, which appears relatively expensive compared to large-cap stocks.
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The risk-to-reward ratio in midcaps might not be as favourable, especially given the current market conditions and uncertainties, including global economic trends and upcoming elections. This cautious sentiment suggests that investors may choose to focus on large-cap and potentially defensive sectors within the PSU index as a strategy to navigate potential corrections or market volatility.
Sanjay Moorjani, Research Analyst, SAMCO Securities
The PSU Index has witnessed an extraordinary run over the past year and a half. However, there are some pockets where the valuations are stretched. Even in the Q3FY24 results, fundamentals were far behind the market valuations. However, the government's persistent prioritisation of power development, indigenous production for defence, railways and affordable housing projects has upheld investor enthusiasm in this sector. The expectations of the NDA government coming back to power might further lead to a rally in PSU stocks. Amongst the PSU stocks, we like HAL,Cochin Shipyard, NTPC and Railtel.
Read here: These 5 multibagger stocks in Nifty 50 gave up to 125% return in one year
Vinit Bolinjkar, Head of Research, Ventura Securities
The surge in Indian PSU stocks has grabbed investors' attention. Key drivers include:
1. Capex Boom: Government-led infrastructure spending has boosted demand for PSU goods and services, driving stock prices higher.
2. Political Stability Anticipation: Expectations of a BJP victory in the upcoming elections have bolstered confidence in continued pro-business policies, fueling optimism for PSU stocks.
3. Mixed Q3 Performance: While some PSU firms posted strong earnings, others struggled due to factors like rising costs and supply chain disruptions, raising concerns about sustained growth.
Read here: This PSU real estate stock is up 260% in a year. Are there more gains ahead?
We expect that in the short term, depending on the Q4 performance, the PSU might see a selective correction. However, with continued capex and the growth plans intact, flow of orders & with the stable government, we expect the continuation of rally for the PSU stocks post the elections.
Our top picks are: BHEL, RVNL, NTPC, HAL, IRFC, Mazagon Dock,NMDC, Garden Reach Shipbuilders, IREDA, and NALCO.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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First Published:
26 Apr 2024, 10:40 AM IST
