PSU stocks turning value creators after decade of underperformance; Edelweiss bets on these shares

By: |
Updated: July 05, 2021 11:37 AM

Listed public sector companies may now be turning the page, after a decade of underperformance, to emerge as attractive investment opportunities.

PSU Stocks, Stock marketPSUs, except banks, could also get an edge for operating in oligopolistic sectors. (Image: REUTERS)

Listed public sector companies may now be turning the page, after a decade of underperformance, to emerge as attractive investment opportunities. Domestic brokerage and research firm Edelweiss believes that as the environment turns reflationary and valuations remain at a discount, the fortunes of PSU stocks could change. “PSUs have been value traps in 2010s (flat for decade) in stark contrast to being value creators in 2000s (10x in 10 years),” Edelweiss Securities said in a note. PSU stocks underperformed during the previous decade due to ballooning debt and hurt by the government’s pro-cyclical fiscal policy.

What’s changing for PSU stocks?

Moving away from the deflationary trend could benefit the PSU stocks. “With commodity price rally broadening now to oil prices and demand recovery underway, it augurs well for PSU profitability and stock performance. Historically, during commodity price rise, PSU stocks have delivered very strong returns, with their earnings tending to do better than that of Nifty,” they said. Further, PSU companies’ capex may have peaker, according to Edelweiss. Capital work in progress (as % of gross block) seems to have peaked out and is now trending lower, suggesting a lot of assets now coming on stream. “With capex cycle peaking and improving cash flows, there is significant deleveraging potential for equity investors. Thus, PSUs present large operating and financial leverage potential to capitalise on the changing macro environment,” they added.

PSUs, except banks, could also get an edge for operating in oligopolistic sectors. In most industries (ex-banks), their elevated market shares have remained broadly intact. Hence, changing environment can quickly lead to a bounce in these franchises,” the note said. PSUs have 83% market share in the coal sector, 88% in fuel retailing, 40% in power transmission, and 75% in oil exploration.

To top it all PSU stocks are available at attractive valuations. Currently, PSUs (ex-financials) are trading at a record 60% discount to Nifty. Edelweiss highlighted in  2011 these traded at a mild premium. “While we are far away from the business cycle vibrancy seen in 2011, we believe such large valuation discount for strong franchises (as most are present in oligopolistic industries) is unjustified,” Edelweiss said.

Investable themes

Edelweiss has classified PSUs into three categories; structural stories, cyclicals, and balance sheet improvement. Among the structural stories, the brokerage firm believes city gas distribution companies with the power of pricing and limited competition could benefit going ahead. Along with these, Container corporation is also seen as a structural story. “In India, the share of railway freight is significantly lower than that of roadways–one of the bottlenecks for manufacturing. However, things are likely to change on this front with the commissioning of the Western Dedicated Freight Corridor (DFC),” they added.

In the cyclical space, oil marketing companies are expected to benefit from strong refining and marketing margins. They added that marketing margins are currently on a structural upswing and current high levels should sustain. Further upstream oil and gas businesses such as GAIL and ONGC — both deep cyclicals are believed to offer value at current prices. 

Banking on improvement in balance sheets, Edelweiss Securities has picked utilities as the cheapest way to play industrial recovery. Banks have also made the cut in this theme as analysts expect a turning corporate cycle to benefit PSU banks with their strong buffers. 

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Equitas Holdings, Equitas Small Finance Bank jump up to 10 per cent after amalgamation nod
2DLF shares climb over 3 per cent; reach 52-week high after Q1 earnings
3Asian stock markets advance after Wall Street rises to record