Further upside in PSU stocks appears limited, Elara Capital warns

After the recent rally, the room for further upside in stocks of public sector companies appears limited, brokerage house Elara Capital said on February 15, citing elevated valuations and suggested a cautious approach.

The upcoming general elections may, however, spur a near-term momentum, historically resulting in a 14 percent average rally. After bottoming out in February, the index has yielded an average return of 22 percent until the result announcement day, Elara said.

The PSU Index is now trading at 11 times the 12-month forward P/E. In the past year, the Nifty surged 22 percent. The BSE PSU index gains reached 18 percent so far this year, outpacing the Nifty’s 0.4 percent rise. The year 2023 saw the PSU index gain 55.3 percent, while the Nifty jumped 20 percent.

PSU stocks surged on government boost to capex and sector-specific factors. In the February 2024 budget and subsequent finance ministry statements, the government emphasised 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. PSU top management performance is now tied to the stock performance, signaling governance improvements for State-Owned Enterprises (SOEs).

Elara expects that after the elections, a potential upside may arise from value unlocking through disinvestment. The government aims for Rs50,000 crore in FY25, up from Rs30,000 crore in FY24, though the target may seem ambitious. The impending IDBI Bank sale might resume after the general elections.

Elara anticipates the continued dominance of the ‘offer for sale’ route, emphasising the government’s intent to privatise for improved efficiency and value unlock. A period of cautious optimism in the PSU space hinges on strategic government actions and post-election market dynamics, offering selective opportunities for value realization, it added.

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