Should you invest in PSU stocks?

• Follow

In the past 6 months, the Nifty has provided investors with a nearly 12% return. However, during this period, the BSE PSU Index, representing government companies, has experienced a significant jump of around 40%. This means that there has been a strong surge in the shares of government companies compared to the overall market. So, what is the reason behind this rally in PSU shares? How sustainable is this rally? And is it still a good time to buy PSU shares? If yes, where can one consider making purchases? Let’s explore.

In the last 6 months, while the government companies’ index has recorded a rapid growth of about 40%, excluding banks, there are approximately 8 government companies whose shares have surged by 100% or more during this period. This implies that these companies have delivered returns of more than double.

Only one stock, Gujarat Gas, a state government-owned company, has delivered negative returns in the past 3 and 6 months.

Now the question arises, what is the reason behind the rapid surge in PSU or government company shares? The PSU index’s shares of government companies have been outperforming for several years. This can be attributed to a few factors. First, there was a valuation comfort because these stocks had not performed well for quite some time, making their valuations relatively cheaper. Second, there was under-ownership, indicating lower holding by large institutional investors.

However, the government shifted its focus towards capacity expansion and increased spending, particularly in the manufacturing and infrastructure sectors. This led to significant benefits for government sector companies. Moreover, initiatives like Make in India and Aatmanirbhar Bharat prioritized domestic companies in sectors like power, railways, infrastructure, capital goods, and defense. This focus resulted in improved order books and volume growth for these companies.

Santosh Meena, Head of Research at Swastika InvestMart, suggests that there has been a breakout in the index of government shares after 14 years. India has transitioned from a net importer to a net exporter in the mobile phone and defense sectors. The government’s focus on products manufactured by domestic companies has started benefiting them.

The question also arises about the sustainability of the rally in PSU shares. Santosh Meena believes that the bull run in the stock market continues until a bubble-like situation occurs. Currently, there is no such bubble, and he anticipates that the rally will persist at least until May 2024, with some profit booking possible thereafter. Until 2025, India is expected to progress towards becoming the third-largest economy globally, benefiting companies in infrastructure, power, capital goods, and the financial sector.

According to Santosh Meena, it is advisable to invest in dividend-paying companies in the PSU sector for at least 1-2 years. Specifically, he recommends investing in companies such as SBI in banking, HAL, BEL, and BHEL in defence, PFC, REC, Power Grid, and NTPC in the power sector, and IRFC, RVNL, and IRCTC in the railway sector. He suggests avoiding shares like IFCI, which may not be of high quality.

Given that these shares have experienced significant growth recently, it won’t be surprising if there is profit booking of 15-20%. If someone has 2-3 years horizon, then he can invest in selected PSU shares for long term.