Earnings contraction, poor returns weigh on stock valuations of PSUs

Most of the top public sector firms are facing challenges, both on the top line and bottom line fronts.

Six of the top 10 PSUs in terms of revenues reported a decline in earnings on a year-on-year (YoY) basis during the trailing 12 months ended September 2020; a similar number reported an earnings contraction during the period.

The combined revenues of these top 10 PSUs, including industry leaders like State Bank of India, Indian Oil, ONGC, NTPC, and Coal India, were down 11.3 per cent YoY during the year ended September 2020; their combined net sales were down 26.7 per cent YoY during this period.

Earnings contraction, coupled with poor return on net worth (RoNW), weighs on the stock valuation of these PSUs. Seven of the top 10 PSUs reported RoNW lower than the Nifty50’s average RoNW. Not surprisingly, most PSUs are among the cheapest stocks among their peers.  

However, the earnings outlook for industrial commodities and energy producers — such as Steel Authority of India (SAIL), GAIL (India), and ONGC — has improved in recent quarters because of the global rally in commodity prices. This has perked up these companies’ share prices, but they still have a lot of ground to cover, given their underperformance over the years.

Many investors, however, may find these top PSUs as value stocks thanks to their low valuation and leadership position in the industry.