Public sector companies have delivered a stellar return to investors on Dalal Street during the past one year. As a result, the BSE PSU index (up 60%) has managed to outperform the benchmark BSE Sensex (up 53%) since June 2020.
Industry watchers believe that improvement in the bottomline and attractive valuations have managed to support state-owned players in the recent past and there is further scope for reasonably good returns in companies that can ensure significant changes in their operating and governance performance, especially in the context of the disinvestment programme.
Barring Mishra Dhatu Nigam (down 2.64%), other players in the BSE 500 index delivered a positive return to investors in the past one year. With a rally of 421%, Hindustan Copper emerged as the top gainer in the list. The scrip climbed to Rs 159.50 on June 9, 2021 from Rs 30.60 on June 9, 2020. On the other hand, SAIL, MMTC, Indian Bank and Bank of Maharashtra also gained over 150%.
Other PSU majors including Bharat Heavy Electricals, Shipping Corporation of India, State Bank of India, National Aluminium, NBCC, BEML, Bharat Electronics, Indian Overseas Bank and Gujarat Gas also advanced between 100%-145%.
A study done by JM Financial on the broader BSE 500 companies suggests that PSUs share of profits rose from 18% in FY18 to 28% in FY21, after consistently declining from 39% in FY11. It further highlighted that the negative spread of the return ratio of BSE PSUs against the BSE500 has narrowed considerably from -700 basis points to -100 basis points.
“Despite the strong rebound over the past year, valuations of the PSU index are hovering around 60% discount to the broader index. Compared with valuations prior to FY20, current valuations are also considerably depressed. Reasons for the underperformance over the past 3-4 years are overhang from disinvestments and continued extraction of dividends to fund fiscal requirements,” JM Financial added while giving its bullish view on selective names. Have a look.
While State Bank of India’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. For an expected ROE trajectory of 15%, the core-bank valuations are still undemanding and provide an attractive entry point for long-term investors.
JM Financial believes that the company 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 order book backlog (Rs 53,000 crore, 4x 4QFY21 sales) and a strong order pipeline and ramp-up of non-defence revenues and service income. The stock has been delivering consistent growth over the past 15 years, with a healthy RoIC of 22-23%. JM Financial sees a low probability of further stake sale-induced de-rating and expect the stock to re-rate from 16.5x at present.
Clarity on Land License Fees (LLFs) has removed significant overhang on the stock. The focus has now shifted to potential bidders and the prospective promoter of the company as GoI intends to divest a 30.8% stake (GoI holds 54.8%) in the company. The brokerage likes Concor given its pan-India ICD network, market leadership and diversified business. JM Financial has set a target price of Rs 740 for Concor.
Recovery in global oil demand due to the widespread vaccination drive across the globe is likely to aid refining margins, while the outlook on marketing margins is improving due to oil marketing companies strong pricing power and limited dependence on global factors. JM Financial key picks are BPCL, HPCL and ONGC. It prefers BPCL among OMCs given significant value creation optionality from synergy and efficiency improvement
arising from its impending privatisation. JM Financial further added that HPCL is trading at an attractive valuation of around 0.97 times FY23 price to book against a 3-year average of around 1.1 times. It also believes that ONGC is the key beneficiary of rising crude prices.
With the government’s stake in NTPC falling to 51%, JM Financial sees a diminishing risk of a fresh stake sale. The target of 25% green energy mix by FY30 should allay ESG concerns and it has overcome past dampeners (FY18-19) of low coal supply/plant availability factor (PAF)-led fixed cost under-recoveries, with high plant PAFs. JM Financial has a target price of Rs 145 for NTPC.
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