BSE PSU Index soars 93% in past year, but PE still at 40% Nifty discount

Despite the BSE PSU Index witnessing a 93% rally in the past year due to EPS upgrades and RoE improvement, its price-earnings ratio remains at a 40% discount to the Nifty Index. Jefferies suggests this discount to the Nifty provides a 15% rerating potential to average levels. A shift in the government’s stance towards ‘value maximisation’ for PSUs could push it above the average.

In the past 12 months, Nifty surged 22%. So far in 2024, BSE PSU gains reached 18%, outpacing Nifty’s 0.4%. The year 2023 saw PSU gains of 55.3%, while Nifty jumped 20%.

PSU stocks surged, boosted by government capex and sector-specific factors. Despite outperformance, the PSU Index’s PE at 12.1x is at a 40% discount to Nifty, which currently trades at 22.3x, compared to the pre-FY18 average discount of 31%. While PSU index valuations before 2012 aren’t available, Jefferies’ valuation check indicates higher multiples for PSU Banks, power/coal utilities, and select oil & infra companies from 2006-2012.

PSUs’ RoEs dropped from 14-15% to 4-6%, mainly due to the drag from PSU banks. However, overall RoEs have rebounded to 12-13% as profitability recovers and is expected to improve further. Notable exceptions to large EPS upgrades include ONGC, Concor, and BHEL, a Jefferies report said.

Jefferies said its top PSU picks are State Bank of India, Coal India and NTPC. NTPC, with expected 10-12% EPS growth, is the top choice over Power Grid with single-digit EPS growth. Both have re-rating potential based on the 2006-12 example, Jefferies said. Additionally, Coal India stands to benefit from planned thermal capacity additions, given its role as a major coal supplier. Despite ample coal reserves, increased mining activity is needed to meet demand. The stock appears undervalued at 8.3x Mar 2025E PE and offers a 6% dividend yield, the global brokerage said.

In the February 2024 budget and subsequent Ministry of Finance statements, the government emphasised on a shift towards value maximisation for PSUs. Over the past five years, the government has moved away from ETF disinvestment, now focusing on dividends, stake sales, and asset monetisation. PSUs’ top management performance is now tied to stock performance, signaling governance improvements for State-Owned Enterprises (SOEs).

PSU Bank index surged 78% YoY, outpacing private banks by 70ppt, driven by earnings turnaround and attractive valuations. Their lower loan-deposit ratios enabled them to push loan growth, narrowing the gap with private banks compared to pre-COVID levels. Valuations suggest a rerating potential of 25-30% on PE/PB valuations, with RoE compounding-based returns of over 15%, a Jefferies report said. Oil PSU stocks rallied since Oct 2023, supported by the government’s decision not to cut auto fuel prices amid elections and falling crude oil prices. The budget implies stable marketing margins ahead, but potential oil price increases remain a risk, it added.

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