Reform hopes breathe life into PSU stocks

BHEL, BEL, BEML, Oriental Bank of Commerce, Power Finance have rallied more than 5%

Shares of public sector undertakings (PSUs) gained on Tuesday after Monday evening’s exit poll data projected the Bharatiya Janata Party–led National Democratic Alliance (NDA) crossing the majority mark of 272 seats in the Lok Sabha.

If the NDA's tally surpasses UPA's 259 tally, the new government may well be one of the strongest in recent times with the party not needing to go in for any hard bargaining with post-poll allies. This assumes more significance for the PSU stocks that, over the past few years, have been waiting for a policy boost for a change in their fortune.

Among individual stocks, Bharat Heavy Electricals Limited (BHEL), Bharat Electronics, BEML, Oriental Bank of Commerce, Power Finance, Indian Oil (IOC), OIL India and Hindustan Copper are among few have rallied more than 5% each on the Bombay Stock Exchange (BSE).

The S&P BSE PSU index, a gauge for state-owned shares, rallied 2.5 per cent as compared to a 1.4 per cent rise in the benchmark S&P BSE Sensex. Thus far in 2014, the index has moved up nearly 21 per cent, as compared to a 13 per cent rise in the benchmark index

Analysts, however, are cautious on what lies ahead for the markets. “We view the exit polls with some caution, based on the results in 2004 and 2009, and especially in this case, where there appears to be a differential between them and the majority of pre-election opinion polls. Additionally, the bar to exceed expectations on the final counting day (Friday) has moved even higher,” said Sonal Varma, Aman Mohunta and Alastair Newton of Nomura in a report.

"However, notwithstanding a possible knee-jerk market reaction on 16 May, the exit polls confirm and strengthen our baseline expectation of a stable NDA-led government, which is a positive outcome, in our view," they add.

Investing strategy

But what does this mean for the reform process, especially for the PSUs? And then, what should your strategy investment be?

Says Jyotivardhan Jaipuria, managing director and head of research, Bank of America-Merrill Lynch: “We believe the market is currently pricing in a stable coalition. In a stable government scenario, we highlight three themes: (a) high quality domestic cyclicals (b) reform exposure (c) exposure to beaten-down deep cyclicals as a tactical strategy, including infrastructure and PSU banks.”

Dipen Shah, head of private client group research at Kotak Securities, suggests the reform process will continue. “A stable government will be able to provide impetus to investment in the infrastructure sector, besides addressing policies related to fiscal issues. Divestment in PSUs is an ongoing process and is likely to gather steam once the new government is in place. Among the PSUs, we like the infrastructure sector, banking and the capital goods sectors," he added.

Mayuresh Joshi, vice–president for institutional research at Angel Broking, says: “Given the run-up, one needs to be stock- selective. From the mid-cap PSU banking space, we like Syndicate Bank and Bank of Baroda, ONGC from the energy pack, and Power Grid from the transmission space. We also like Engineers India. As regards BHEL, we feel there is some amount of margin compression. However, the stock can move up, given the overall sentiment.”