Global investment banking firm Jefferies sheds light on the remarkable turnaround of Indian Public Sector Undertakings (PSUs) over the past 12 months, marking a significant departure from a decade of underperformance prior to 2020.
The PSU Index has surged, outperforming the Nifty by an impressive 70% in the last year, driven by notable earnings per share (EPS) upgrades and a noteworthy improvement in Return on Equity (RoE).
Jefferies emphasizes that despite this recent surge, the PSU Index still trades at a substantial 40% discount to the Nifty, presenting a compelling 15% rerating potential to reach the average level. A key factor contributing to this resurgence is the government’s altered stance towards “value maximization” for State-Owned Enterprises (SOEs).
The report highlights three top PSU picks identified by Jefferies: State Bank of India (SBI), Coal India, and NTPC.
In the calendar year 2023, the PSU Index outperformed the Nifty by 40%, with an additional 15% outperformance recorded year-to-date. The rally across the PSU spectrum is attributed to both the government’s accelerated capital expenditure and sector-specific factors.
Despite the robust performance, the PSU Index’s Price-to-Earnings (PE) ratio stands at 12.1x, representing a 40% discount to the Nifty. This compares to a pre-FY18 average discount of 31% to Nifty PE, indicating potential room for further revaluation.
Jefferies draws attention to historical valuations, suggesting that PSU Banks, power/coal utilities, and select oil & infra companies had significantly higher multiples during the 2006-2012 period.
RoEs for PSUs had previously dipped to 4-6% from the 14-15% range, mainly due to challenges faced by PSU banks. However, with profitability recovering, RoEs have improved back to 12-13%, with expectations of further enhancement.
The majority of PSUs have witnessed substantial EPS upgrades, though exceptions include ONGC, Concor, and BHEL.
The PSU Banks index has surged 78% YoY, outpacing private banks by 70%. This impressive performance is attributed to a sharp earnings turnaround, driven by improvements in asset quality and attractive valuations.
PSU banks have also enjoyed lower loan-deposit ratios, facilitating competitive loan growth. In FY24, PSU bank credit growth is only 2-3ppt behind private banks, a significant improvement from the 8-10ppt gap pre-COVID.
Comparing PSU Bank valuations to the 2006-2012 period, marked by strong fundamentals and a rising capex cycle, Jefferies suggests a rerating potential of 25-30% on PE/PB valuations, in addition to the anticipated normal RoE compounding-based returns of 15% or more.