PSUs mount comeback, outrun Sensex after seven years

Revival in global commodity prices, beaten-down valuations, attractive dividends fuelled PSU stocks

Stocks of public sector units staged a strong comeback in financial year 2016-17. The BSE PSU index rallied 40 per cent during the year, outperforming the benchmark Sensex, which rose 16 per cent over the period. After seven years, the PSU index has done better than the Sensex. 

Market participants said revival in global commodity prices, beaten-down valuations, and attractive dividends fuelled up PSU stocks over the last one year.
 

During FY16, the PSU index lost nearly 20 per cent, primarily on poor performance of banking stocks and downturn in commodity cycle. 

"PSU stocks have always been safe avenues for investors as they have strong asset base. The stocks, however, took a beating in FY16 due to a variety of global and domestic factors. In the past one year, the outlook has improved, with government actively trying to increase efficiency of PSUs. The global and domestic markets have also been conducive. Further, PSUs have also paid attractive dividends to investors," said Sunil Shah, head of research, Axis Securities.

In terms of stock performance, four PSUs - Indian Bank, Vijaya Bank, Rural Electrification Corporation, and Hindustan Petroleum - have more than doubled during 2016-17. On the other hand, Indian Oil, National Aluminum Company (Nalco), and Punjab National Bank have rallied more than 75 per cent over the period.

Traditionally, most of the PSUs have remained cash-rich, adding to their value. However, in the last two years, the government has increasingly tapped into their cash resources to bump up revenue for the exchequer. The Centre has also asked PSUs to start buybacks of shares.

Going forward, experts say the sailing for PSU stocks will not be so smooth, especially for banking stocks.

"One of the key reasons for the PSU stock rally during FY17 is the strong performance by banking stocks. However, banks are in a spot as loan books are not growing fast. Some sectors where banks have high exposure are yet to fully recover," said Prateek Agrawal, CIO, ASK Investment Managers.

Further, the high amount of cash PSUs gave investors through dividends and buybacks could hold back capex growth of these companies. Capex is capital expenditure.
 

According to Bank of America Merrill Lynch (BofA-ML), with the stiff revenue target for FY18, the Centre may pressure PSUs more to generate cash. However, due to the over-leveraging in the last two years, very few PSUs remain cash-rich now, it says.

BofA-ML has advised investors to avoid PSU stocks for the next 12 months.