PSU stocks: Govt Goldmine: PSU stocks still partying hard on D-Street

Mumbai : The renewed momentum in public sector stocks after the election results on June 4 have resulted in these entities adding nearly ₹12 lakh crore in market capitalisation in little over a month. So far in 2024, these stocks have gained nearly ₹22.5 lakh crore in market value, with the spike in the prices triggering speculation that the government may be tempted to raise money through stake sales. Money managers said any share sale could temper the upmove in the stocks.

“There is a significant likelihood that the government may seek to raise funds by diluting its stakes in certain PSUs (public sector units), which could exert downward pressure on their prices,” said Sunil Damania, chief investment officer, MojoPMS.

PSU stocks gained further after the poll results on optimism that continuation of the government’s policies would benefit these companies. Since July 1, shares of Rail Vikas, Indian Renewable, Shipping Corporation, Mazagon Dock, Oil India, Railtel Corp. and Cochin Shipyard have rallied between 25% and 50%.

As of March 31, the government held more than 75% in about 10 listed companies, including Life Insurance Corp. of India (LIC), IRFC, Uco Bank among others.

Min Public Shareholding Norms
Some of these other listed firms are Indian Overseas Bank, Mazagon Dock, Fertilisers and Chemicals Travancore (FACT) and General Insurance Corp. Under the minimum public shareholding rule, promoters must not hold more than 75% of a company. According to ETIG estimates, the government could earn at least ₹2.9 lakh crore if it offloads shares to meet this threshold.

Sebi has given LIC time until May 2027 to achieve a 10% public float first. The public holding in five out of 12 public sector banks is still below the 25% mark. The current deadline for these lenders to meet the minimum public shareholding is August 2024.

To be sure, the government hasn’t exactly been hustling to meet assetsale targets. Last year’s budget had set a disinvestment target of ₹51,000 crore, which was later reduced to ₹30,000 crore. The rally in PSU shares in the past year has been partly on account of the absence of government share sales, which would have led to a continuous supply of paper and pus hed down prices.
Fund managers and analysts said valuations of many of these shares are rich after the recent surge.“Many PSUs have become momentum stocks which speculators excessively trade,” said VK Vijayakumar, chief investment strategist, Geojit Financial Services. “Even though the prospects for these segments look bright for many years, there is no valuation comfort in these segments as many of them have already discounted the earnings for a few years.”

PSU stocks like Bharat Heavy Electricals (BHEL), FACT, Hindustan Copper, Mishra Dhatu Nigam and Railtel Corp., among others, are tra ding at price-to-earnings (PE) ratio —a widely-used valuation measure —of over 100. The Nifty is trading at a PE ratio of around 22 times.

Rich Valuations
“Despite the stable business outlook for numerous PSU companies, the potential for further price appreciation is constrained by these rich valuations,” said Damania.

Retail investors could benefit from the rally through the Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) rather than chase momentum, said Gaurav Dua, head, capital market strategy, Sharekhan.

“We believe that many PSU engineering stocks and PSU banks stocks have run ahead of fundamentals, and one needs to be very selective now,” he said. “On the other hand, we still see value in PSU power and gas-related stocks.