Rs 7 lakh crore profit in 10 days! Why PSU stocks are rallying like Modi managed '400 paar'

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Investors who were quick to dismiss high-flying PSU stocks on June 4 when BJP failed to get the absolute majority in the Lok Sabha on its own are now forced to eat the humble pie. After crashing 16% on result day, PSU stocks are once again leading the bull run as if PM Modi actually managed to achieve the ambitious target of '400 paar'.

Driven by defence PSU Mazagon Dock Shipbuilders, which has seen a 48% return, the combined market capitalisation of 56 PSU stocks, which are part of the BSE PSU index, has surged by Rs 723,823 crore to Rs 68,03,059 crore in just 10 trading sessions (from June 4 closing till 19 June).

Shares of RCF have zoomed 33%, Cochin Shipyard 24.5% while HUDCO and MMTC are up 23% each. Other top gainers include HAL, BEL, and BHEL.

The fate of the multibagger bull run in PSU stocks was linked to the BJP's performance in the Lok Sabha elections and was also segmented as "Modi stocks" along with other capex-linked stocks by CLSA. Investors are optimistic because not only does the current NDA government look stable, but it has also given signals of policy continuity, especially when it comes to infrastructure and domestic manufacturing.

Also read | PM Modi prediction comes true! Sensex up over 5,000 points in ballot-proof rally

The government’s infrastructure and capex push, which had gained momentum post-pandemic, along with cleaner balance sheets, improved governance, margin tailwinds for commodities, and burgeoning order books, will continue to drive PSU outperformance and their rerating, according to analysts.Dalal Street's top investor Ramesh Damani, who has been a PSU bull for a long time, says the leadership remains with PSU stocks."The government has shown they can extract value and deliver results year-on-year and that has been reflected in how the PSU index has done. I hope analysts who said very disparagingly about PSUs are eating humble pie," he said.

During FY19-24, PSU earnings reported a 33.8% CAGR, outperforming that of the private sector, which posted an 18.6% CAGR over the same period. The share of PSUs in the profit pool expanded to 36% in FY24 after hovering in the 17-30% range during the past few years.

Further, the earnings of PSUs during FY24 witnessed a spectacular growth of 45% YoY, Motilal Oswal said.

The RoE of the PSU universe also jumped to 17.6% in FY24 from the lows of 5.2% in FY18.

"The profitability of PSUs is likely to improve notably across domestic and global cyclicals, with a sharp turnaround in the fortunes of PSU banks driving the overall trend. Higher commodity prices over the last two years have strengthened the P&L and balance sheets of metals and O&G PSUs. The government’s emphasis on localisation, increased capex, and ‘Make-in-India’ in the defence sector has catalysed the improvement in the fortunes of industrial PSUs. Hence, we expect the recovery in PSUs’ contribution to earnings and market capitalization to continue," Motilal's Gautam Duggad said.

The brokerage's preferred PSU ideas are SBI, Coal India, GAIL, HPCL, and Bank of Baroda.

PSU banks
The Street remains bullish on PSU bank stocks as they trade at about a 35% discount relative to the limelight private peers despite similarities in loan growth expectation, RoE profile, asset quality, lower risk in terms of loan growth and margins, and lower float and institutional holding.

"PSU banks are corporate heavy and have an advantage over the cost of funds (high CASA ratio and liquidity) should help them maintain their lending market share. Deep branch penetration would help them keep their liability granularity strong. The benefits of operating leverage would kick in as cost growth is expected to be slower than loan growth. Consolidation (risk aversion), cleaned up balance sheet, high PCR, and written off pool can keep credit cost benign," said Antique Stock Broking's Sohail Halai.

Global brokerage Macquarie has, however, told investors to avoid PSU banks and even downgraded SBI.

"We think PSU banks will see falling ROEs driven by the normalisation of credit costs. There is additional risk of ECL impact, which we are yet to factor in our earnings," Macquarie's Suresh Ganapathy said.

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