According to a recent report from Motilal Oswal Financial Services, the profitability of PSUs is expected to increase significantly throughout both domestic and international cyclicals, with a dramatic improvement in the performance of PSU banks leading the overall trend.
The brokerage stated that the profit and loss and balance sheets of metals and oil and gas PSUs have strengthened due to increasing commodity prices over the past two years. The government's emphasis on localization, higher capital expenditures, and "Make-in-India" in the defense sector, according to the broker, has helped industrial PSUs' fortunes, and the brokerage expects this recovery to continue in PSUs' profits and market capitalization contributions.
"We think the valuation premiums for PSUs are projected to be steady in the foreseeable future given the sustained earnings momentum and guidance. However, profits forecast vs. delivery will be the primary monitorable given to the multi-year high valuation and fast run-up in certain PSU stocks," the statement stated.
State Bank of India (SBI), Coal India Ltd., GAIL Ltd., HPCL, and Bank of Baroda are among its favored PSU stock ideas.
"After doing poorly for ten years, the Indian PSUs have achieved a fantastic recovery. They have designated FY24 as the glaringly exceptional year. This was demonstrated by the PSU businesses' fast rise and their index's superior performance above the Nifty-50 in the prior year, according to the brokerage.
PSU earnings for FY19–24 showed a 33.8 percent compound annual growth rate (CAGR), which was higher than the 18.6 percent CAGR recorded by the private sector during the same period. PSUs' proportion of the profit pool increased to 36% in FY24 from a range of 17% to 30% in the previous three years.
PSU profits increased by a robust 45% year over year in FY24.
Remarkably, throughout the last five years, PSU loss pools have steadily decreased. Over the previous several years, the share of loss-making enterprises in the profit pool has decreased, making up only 1% as of FY24 compared to 45% in FY18. Additionally, the RoE of the PSU universe increased from 5.2 percent in FY18 to 17.6 percent in FY24, according to the report.
Because of its cautious margin assumptions for the oil and gas industry, MOFSL anticipates its PSU coverage, which accounts for 55% of Indian PSU m-cap, to moderate to 6% PAT CAGR in FY24–26. It said that other industries' profit growth is still robust.
"We project a PAT CAGR of 15% for MOFSL Coverage PSU Universe, excluding O&G. BFSI would generate 120% of the incremental earnings for the mentioned Universe, with Metals coming in second with 22%. O&G is probably going to negatively impact total profitability by -47%, which would lower the profits CAGR, according to the report.
Modi 3.0's political stability, meantime, is encouraging for the capital markets and economy as it offers the continuity and consistency in policymaking that is required to continue advancing the government's economic program.
"This verdict and the consequent political stability and continuity in policymaking will act like an icing on the cake and keep India as the cynosure of all eyes, in our view," the brokerage stated.
