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Pessimism is high in this space but better don’t ignore it

The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

— Sir John Templeton

Going by this wisdom of one of the most successful investors and mutual fund managers of the 20th century, public sector companies appear to be making a solid investment case. Gloominess in this space is at its peak.

Mumbai-based brokerage B&K Securities in its recent research report wrote many of the funds that they met told them that they were not interested in even discussing PSUs.

With up to 97 per cent drop since the beginning of this decade, these stocks have become a minefield investors now fear to tread. BSE PSU index is down over 21 per cent during this period.

Will this trend change anytime soon? Analysts are not very hopeful.

But valuations, which have turned a lot cheaper relative to fundamentals, tell a different story: It could just be the time to nibble at select names from this basket.

Public sector banks are already drawing some interest, as their private peers have witnessed a good runup in recent weeks and the crippling NPA mess appears to have bottomed out.

They together with other top PSUs like IFCI, Bharat Heavy Electricals (BHEL), Shipping Corporation of India, Nalco, GMDC, Oil India, ONGC, PFC and SJVN are trading at valuations lower than their book values. Trailing 12-month price-to-earnings ratios of most of these companies have slipped below the industry averages.

“Healthy pessimism is still there in the PSU space, but opportunistic buying can happen now,” says Sudip Bandyopadhyay, Group Chairman, Inditrade Capital.

Kotak Institutional Equities says PSU stocks are trading at inexpensive multiples mainly because of the market’s worries about unfavourable regulations, irrational government actions and repeated disinvestments. It says most of these stocks are offering meaningful value at their current price levels.

There are chances that some of the PSUs would deliver some quick returns in the near term. The index representing these stocks has a track record of outpacing Nifty at least for some time after every general election.


“Historical data of election years suggest a post-poll hope rally in PSU stocks. Time is ripe for that rally to take off,” B&K Securities said.

S Naren, ED & CIO, ICICI Prudential Mutual Fund, expects a re-rating for the PSU stocks. “I am hoping that the new government would recognise that most PSUs are deeply undervalued and there are huge opportunities to rerate them through effective management of the shareholding in next five years. Strategic value of many of these PSUs is simply fantastic,” he told ETNOW during an interaction.

SBI Securities says the government’s aggressive divestment targets for FY18 and FY19 led to rapid stake reductions in most central public sector enterprises (CPSEs). That overhang continuous over many CPSEs. But current attractive valuations with high return ratios make it a favourable case for investing in select CPSEs.

Table 2

ICICI Prudential’s Naren says already gone “massively overweight” on PSU stocks. “PSUs got de-rated for 10 years and at this point of time I have a simple metric to look for stocks that are trading at single-digit trailing PE. Look for stocks that trade at 5 per cent dividend yields and look for names that are not too leveraged. If I look at this combination of high dividend yields, low trailing PE and not too much leverage, I get a number of stocks and that is why we are massively overweight on PSU stocks,” he said.

Since the beginning of January 2011, public sector players like MMTC, Indian Overseas Bank, Hindustan Copper, UCO Bank, Andhra Bank, Bank of Maharashtra, IFCI, Bank of India, BHEL and Central Bank of India have eroded over 75 per cent of investor wealth till March 18, 2019.

At the same time, others like HPCL, BPCL, Balmer Lawrie, ITI and Power Grid have delivered returns from 100 per cent to 270 per cent.

From an investment perspective, B&K Securities prefers BEL, Concor, GAIL, GSFC, HPCL and SBI.

Bandyopadhyay says most of the PSUs are looking oversold and undervalued. “Leaving the banking space aside, there is merit in buying stocks like Bharat Electronics and NPTC from a medium- to long-term perspective. Some of them are looking good from dividend perspective. In the banking space, one can look at SBI and Bank of Baroda, but one should stay cautious on smaller lenders.”

Source: Economic Times