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Top PSU shares to buy for strong returns: PSU index beats Nifty, Sensex; these stocks may re-rate

Financial Express - Business News, Stock Market News

The S&P BSE PSU index has outperformed both Sensex and Nifty over the last one year, and even year-to-date.
(Image: REUTERS)

The S&P BSE PSU index has outperformed both Sensex and Nifty over the last one year, and even year-to-date. Now, valuations of PSU stocks are expected to improve after lagging behind due to disinvestment overhangs. With valuations playing catch-up, disinvestment taking shape, and operation performance improving, brokerage and research firm JM Financial expects select PSU stocks to re-rate and provide investors with lucrative investment opportunities. Over the last one year, the PSU index has soared 62% while Sensex and Nifty have gained 52-55%.

The report highlighted that PSUs’ share of profits rose from 18% in the financial year 2017-18 to 28% in the financial year 2020-21, after consistently declining from 39% a decade ago. Further, the negative spread of the return ratio of BSE PSUs against the BSE 500 constituents has narrowed considerably from -700 basis points to -100 basis points.

While the index has outperformed recently, over a 3/5/10 year period it still remains a laggard. “Reasons for the underperformance over the past 3-4 years are overhang from disinvestments, slated at Rs 2.1/1.75 lakh crore for the last 2 years and continued extraction of dividends to fund fiscal requirements,” the report said. But this might soon change as the government aims at disinvestment with renewed focus. Analysts at JM Financial believe the disinvestment will aid the creation of fresh overhangs. “Overall, with the intense focus on privatisation, the government is expected to minimise frequent stake sales in PSUs via ETF/OFS as these create an overhang on share prices and reduce valuations.”

State Bank of India 

Target price: Rs 525

The largest public sector lender in the country has fared well during the pandemic and is expected to see lower-than-feared stress levels. SBI expected to deliver 15% ROE going forward, aided by increasing credit growth, moderation in credit costs driven by asset quality improvement and improving operational performance. Subsidiaries of SBI, are also accelerating their business, which unlocks value further. “While SBI’s asset quality perception had kept its valuation multiples suppressed despite core fundamentals consistently outperforming expectations, its strong FY21 performance on the asset quality front should support valuation multiples to rerate higher,” the report said.

Bharat Electronics

Target price: Rs 150

BEL, according to JM Financial, is likely to be a key beneficiary of changing structural trends in India’s defence sector, including indigenisation and enhanced fiscal allocation for capital acquisition. The company has a healthy defence oder book and a strong order pipeline from the non-defence segment as well. The stock has been delivering consistent growth over the past 15 years with no revenue decline in past 20 years. BEL’s PE multiple declined to an average of 13x after FY15-18 when the government stake sale accelerated through CPSE ETFs and Bharat-22 ETFs.

Container Corporation

Target price: Rs 740

With clarity on Land License Fees (LLFs) a significant overhang on the stock has been removed. Concor is among the PSUs where the government will trim its stake, eyes are on the prospective new promoter. “We like Concor given its pan-India ICD network, market leadership (>60% market share), and diversified business,” JM Financial said.

Oil stocks- BPCL, HPCL, ONGC

BPCL target – Rs 520

HPCL – Rs 300

ONGC – Rs 130

Analysts at JM Financial believe that the recovery in global oil demand refining margins going forward. BPCL is a preferred pick among OMCs given significant value creation optionality from synergy and efficiency improvement arising from its impending privatisation. While HPCL is favoured for having relatively high exposure to the profitable marketing business, which accounts for nearly 60% of its EBITDA. The brokerage firm is also bullish on ONGC as it is the key beneficiary of rising crude prices. “Every USD1/bbl rise in crude price results in our valuation rising by 3-4%. ONGC also benefits from any potential deregulation of/hike in domestic gas prices given that a government-formed committee is looking into it,” they said.

NTPC 

Target price: Rs 145

NTPC has been under pressure despite delivering 8% net profit CAGR over FY15-21. This, according to the report, is led by ESG concerns and repeated government stake sales. “NTPC ESG concerns are alleviating as the company transitions to a higher mix of green energy. In line with the global trend towards renewables,” the report said. Additionally, with government stake in NTPC falling to 51%, the brokerage firm sees a diminishing risk of a fresh stake sale.

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