What's behind the rally in PSU stocks, and will the uptrend last?

The S&P BSE PSU index has surged over 26 per cent so far in FY24 as compared to 11 per cent up move in the benchmark S&P BSE Sensex.

Stocks of public sector enterprises (PSEs) have seen a good run thus far in fiscal 2024 (FY24), with the S&P BSE PSU index surging over 26 per cent during this period as compared to 11 per cent up move in the benchmark S&P BSE Sensex.

Government's infrastructure and capex push ahead of the state polls due later this year, and the general elections scheduled for May 2024 is one key reason, analysts believe, has seen PSU stocks get rerated in the last few months.

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The government, according to A K Prabhakar, head of research at IDBI Capital, has been proactive and has been stressing on the indigenisation / Make in India theme. A lot of PSU companies, as a result, have bagged contracts and their order book size remains healthy. All this, he believes, has triggered a rally in PSU stocks in the last few months.

“PSUs now need to deliver (on the order book) for the next leg of the rally. One cannot paint the entire basket with the same brush, but a lot of PSU stocks now look expensive. So, one has to pick and choose. There are near-term headwinds that can cap the rally, but for someone who has a 3 – 5 year investment horizon, PSU stocks can be bought on a decline. Amongst the lot, select defence-related plays, IRCON, Bharat Electronics (BEL) and Cochin Shipyard look investment worthy,” Prabhakar suggests.
 

Capex share in overall spending, according to an Elara Securities report, rose to around 27 per cent over April-May FY24 at Rs 56.7 billion versus the past five-year average of around 13 per cent during the same period. Among the ministries that led capex during April-May FY24 as a percentage of budget estimates (BE), the Top 3 were the Ministry of Ports, Shipping and Waterways at around 31 per cent, the Ministry of Railways at around 23 per cent and the Ministry of Roads, Transport, and Highways at around 22 per cent.

In total expenditure, the Ministry of Railways and the Ministry of Road, Transport and Highways were joined by the Ministry of Defence to form the Top 3 with 29.4 per cent, 21.4 per cent and 16.5 per cent in spending, respectively, as a percentage of BE over April-May FY24, the Elara Securities note suggests.

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Meanwhile, at the bourses, Mazagon Dock Shipbuilders, Indian Railway Finance Corporation (IRFC), Mishra Dhatu Nigam, Ircon International, Rail Vikas Nigam Limited (RVNL), Engineers India, and REC have doubled investor’s money by rising between 100 per cent and 190 per cent thus far in FY24, ACE Equity data shows.

BHEL, SJVN, BHEL, Cochin Shipyard, MMTC, MRPL, Hindustan Copper and Power Finance Corporation (PFC) are some of the other stocks that have gained between 74 per cent and 99 per cent during this period.

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Most PSU stocks, according to G Chokkalingam, founder and head of research at Equinomics Research, form a part of the mid-and small-cap basket, which have seen a good run in the last few months. This, he believes, is also one of the key reasons why investors have latched on to the PSU counters.

“The boom in SMID is the real reason for the rally in PSU stocks. In fact, thus far in FY24, the S&P BSE Small-cap index has rallied 41 per cent, while the S&P BSE Midcap index has moved up 33 per cent. They both have outperformed the S&P BSE Sensex during this period by 3x to 4x. PSU stocks just tried to catch up in this rally in small-and midcaps,” Chokkalingam said.

Though he remains cautious on the SMID segment given the sharp run seen thus far in FY24, Coal India and Balmer Lawrie are his two 'buy' calls in the PSU space on attractive valuations.