8 PSU stocks worth betting on now | Economic Times

Dogged by years of underperformance, investors in public sector units (PSU) are a disappointed lot. The NSE PSE index has fallen 40% over the past 10 years, while the Nifty has gained 99% during the time. Similarly, the Nifty has gained 46% over the past five years; but the PSE index has fallen by 19%. The extent of the underperformance gets starker when one finds that while the Nifty is 348% above its 2009 low, the PSE index is just 11% above that level (see chart). "Nifty's performance is despite the fact that several PSUs are in," says Navneet Munot, ED & CIO, SBI Mutual Fund. One of the reasons for the troubles at present in the EPFO can also be attributed to the PSU space. It has much to do with investments in CPSE ETFs and the resultant losses.Should equity investors give the PSU segment a wide berth? No, say experts. The best time to invest in any asset class or segment is when it is generating very low historical returns. Falling prices will bring down valuations to very low levels and the PSU space is no exception to this rule. Short term underperformance may continue for some time because of the government's strategy of piecemeal divestments -continuous offers for sale (OFS) and ETFs are keeping these counters at low levels. However, sentiments will change once the government finally executes its decision to privatise some large PSUs. "Strategic divestment or privatisation can result in re-rating of the PSU basket. Even if the government does so in one or two companies, it will impact sentiments towards other companies and help unlock substantial value," says Munot. 78201341Beware public sector banksThough there is tremendous untapped value in the PSU space, investors should not jump in to buy anything and everything. "Just like other segments, the PSU space is also a mixed bag now. While most of the stocks are undervalued, some are overvalued too. Investors should take a sector or stock-specific approach," says Rajesh Agarwal, Head of Research, AUM Capital. For example, most experts are still negative on public sector banks. "We were negative on public sector banks in pre-Covid days and continue to be negative due to NPA related concerns expected in the next few quarters," says Amit Khurana, Head of Equities & Research, Dolat Capital. 78201357Value in other sectorsPSUs from other sectors are not facing any fundamental challenges now and therefore, their current depressed prices offer good entry points for long-term investors. Valuations are cheap due to sectoral dynamics as well. "Several PSUs are from sectors whose the investment cycle is close to the bottom now. Replacement values of these asset-heavy companies are also substantially higher than their current market capitalisation," says Munot.Stocks worth betting onFrom the PSU space, we have shortlisted stocks with at least 15 buy recommendations and with at least 20% potential upside from current levels. All the selected companies are also offering good dividend yields and due to the government's need for cash, these PSUs will continue to declare good dividends in coming years as well.NTPCBeing an essential services provider, NTPC was able to continue operations during the lockdown and ended the first quarter of 2020-21 with a revenue fall of just 3%. "Due to increased energy demand in coming quarters, we estimate NTPC's net profit to report 21.4% CAGR between 2019-20 and 2021-22," says a recent Geojit report. There is a fear that a push towards clean energy will make NTPC redundant in future. However, NTPC is getting onto the energy efficiency bandwagon and plans to increase its non fossil capacity from 7.1% now to around 30% in the next 10 years.Coal IndiaThis is another company that may be at the receiving end in future due to the planned shift to less polluting fuels. However, the downside from current levels is limited because the present low valuations capture this risk. The dividend yield of Coal India is 9.6%, much higher than rates available on any debt products. Due to its high cash levels-Rs 33 per share as of now-analysts believe that Coal India will continue to maintain high dividend payouts in coming years as well. "We estimate Coal India's dividend yield at 9.3% for 2021-22 and 11.7% for 2022-23," says a recent Emkay report. Due to increased coal demand, despatches have started improving and the normalisation of operations can be a short-term trigger for this counter.IOC & HPCOil refiners are reporting weak numbers because of the fall in gross refining margin (GRM) across the globe. The GRM of IOC and HPC was -$1.8 and -$0.9 respectively during the first quarter of 2020-21. Despite negative GRMs, IOC and HPC were able to report decent net profits in the first quarter of 2020-21 because of their marketing margins. Since negative GRMs will not sustain over the long term, things are expected to improve in coming years. Increased revenue should help the companies report decent numbers in coming quarters. There is increased investor interest in PSU oil refiners now due to the government's strategic divestment plans. While expectations have pushed up the price of Bharat Petroleum Corporation (BPC), limiting any further upside potential, IOC and HPC are still valued at reasonable levels.GailGail is a long term story because of the expected shift from polluting petroleum products to cleaner gas. Though first quarter volumes took a hit due to lower gas consumption, it is getting normalised now and has already reached around 95% of the pre-covid levels. Though it is now quoting at very attractive valuation (PE is just 4.84), investors should not expect sudden recovery in this counter. This is because the government wants to bifurcate Gail into transmission and marketing businesses before taking any strategic divestment action. 78201377NMDCConditions have started improving at NMDC, India's largest iron ore producer. Though NMDC was forced to cut iron ore prices by around Rs 900 per tonne in April-May, prices were hiked by Rs 700 per tonne in July-August. This means NMDC is expected to report decent growth in 2020-21. Market sentiment towards NMDC is also expected to improve once the plans to demerge its steel plant and list with minor shareholding is complete. "While resolution of elevated receivables and capping of investments into steel plant will boost cash flows further, steel plant demerger will help to restore NMDC to being a pure play miner," says a recent IIFL report.ONGCMost of the problems at ONGC can be attributed to the crude oil price cycle. Its weak first quarter numbers were linked to the turmoil in crude markets. After going to the negative zone for the first time in history, international spot crude oil prices came back to around $40 per barrel. Since this level is comfortable for ONGC, the worst is behind it. ONGC has also taken proactive steps during this turmoil and that explains why it was able to manage a y-o-y reduction of operating expenses, exploration cost and employee cost by 21%, 20% and 18% respectively during the first quarter. While low domestic natural gas price is a concern now, starting of new production at KG basin may boost its gas revenue.Power GridThis is another PSU company with very little competition. Since Power Grid has an order book of Rs 51,000 crore, there is clear growth visibility for the next 2-3 years. Though there was a fall in fresh order inflow, it is expected to pick up in coming years because from a longer term perspective, investment in renewable energy and growth in power demand would continue to drive the need for transmission networks. "Given an underpenetrated market and strong competitive positioning, Power Grid is well-positioned to capitalize on upcoming opportunities," says a recent Motilal Oswal report.Why PSU funds make senseIf you are not interested in direct equity investing, you can participate in the PSU space through the mutual funds route. It is a good idea to opt for actively managed funds as fund managers would be able to outperform the NSE PSE index by managing volatility better. 78201386For example, Invesco India PSU Equity Fund was able to generate a return of 7.15% during the past year despite a 24.62% fall in the NSE PSE Index. "Our PSU fund has performed very well for the last few years because we have focussed on PSUs in strong market leadership positions and avoided public sector banks," says Saurabh Nanavati, CEO, Invesco Mutual Fund.(Graphics by Abdul Shafiq/ET Prime)