Limited opportunities with PSUs; bet on dividend yield, momentum: Bernstein

Within in PSU space Bernstein prefers ONGC, Coal India, IOC, Bank of Baroda, GAIL, BPCL, Canara Bank, HPCL, Oil India and MRPL.

After a stupendous rally in the last one year that saw the S&P BSE PSU index rally nearly 90 per cent as compared to 19 per cent surge in the benchmark Nifty50 index during this period, fresh investment opportunities in the stocks of public sector undertakings (PSUs) remain limited, suggests a recent note by Bernstein.

Relative to historical averages, the PSU index, Bernstein cautions, is trading at a steep valuation of 11.2x forward price-to-earnings (PE) and 1.8x price-to-book (PB), which is one standard-deviation (+1SD) above the historical average. By definition, standard deviation is the statistical measure of market volatility, measuring how widely prices are dispersed from the average price.

“We find only limited opportunities within the PSU portfolio - the ones which are high momentum or dividend yielding stocks with reasonable valuations. However, we would argue against chasing high volume PSU stocks, or the ones which are simply value,” wrote Rupal Agarwal of Bernstein in the note. CLICK HERE TO VIEW DIVIDEND YIELDS

ONGC, Coal India, Indian Oil Corporation (IOC), Bank of Baroda, GAIL, Bharat Petroleum Corporation (BPCL), Canara Bank, Hindustan Petroleum (HPCL), Oil India and MRPL are the PSU stocks that Bernstein's top picks in the PSU pack that are high dividend yielding or high momentum, which are not high volume plays and not too expensive valuation-wise. 

 

Relative to the broader market (BSE 500), Agarwal notes, PSU stocks is still trading below the historical mean on a 12-month forward PE basis, and just slightly above the mean on PB.

“Among sectors in this space, all sectors except Energy (based on PB valuation) are expensive - Industrials are valued at +2SD with 7x PB, Financials are valued at 1.7x PB vs. +1SD at 0.8x PB, Materials are valued at 2.5x PB vs. +1SD at 1.8x PB and Utilities are valued at 2.5x PB vs. +1SD at 1.4x PB,” Agarwal said.

Crowded trades

That said, foreign institutional investors (FIIs), Bernstein suggests, have always preferred the private names in India over PSUs, and there has not been any shift in this preference even in recent upcycle for most of these stocks. The aggregate FII ownership in non-PSUs is at 20.5 per cent versus 10-year average of 21.5 per cent, and in PSUs at 9.3 per cent versus the 10-year average of 9.8 per cent.

FII crowding, the note suggests, can be seen in NMDC, Bharat Electronics (BEL), Hindustan Aeronautics Limited (HAL), Bank of Baroda (BOB), Canara Bank, Indian Bank and Union Bank.

Domestic institutional investors, on the other hand, have been reducing their ownership in PSU names and increasing in non-PSU over the last year.

The DII ownership in non-PSU is at 15.7 per cent which is above the 10yr average of 12.8 per cent while their aggregate PSU ownership is currently 13.7 per cent vs. 10yr average of 14.6 per cent. Gujarat Gas, NALCO, CONCOR, Indian Bank, Bank of India and HUDCO are the companies where there is maximum DII crowding, the note suggests.

Earnings

At the bourses, meanwhile, all PSU stocks on the BSE have given a positive return in the last one year. Indian Railway Finance Corporation (IRFC) has been among the top performers, rallying nearly 450 per cent in the last one year.

MRPL, Ircon International, Housing & Urban Development Corporation (HUDCO), NBCC and Rail Vikas Nigam Limited (RVNL) have surged up to 375 per cent during this period, shows ACE Equity data.

A key driver for the performance of PSU stocks at the bourses since 2020, according to Agarwal, has been an improvement in their earnings.

“Looking at current trends, we find that analysts have never been so bullish on earnings for PSU names even though actual earnings have not been showing any uptick recently. Hence, either expectations need to come down, or actuals need to catch-up for the PSU pack to do well,” the note cautions.