Do not chase them purely on recent bull-run

NEW DELHI: Public sector undertaking (PSU) stocks are on a roll. Consider this, LIC shares, which were one of the biggest wealth guzzlers for more than a year after launching the country’s biggest IPO in May 2022, have gained about 75% in the last 3 months, helping the insurer to become one of the most valuable listed companies on the exchanges. Likewise, shares of the country’s largest public sector lender- SBI- have gained 44% in one year time while shares of the largest private lender – HDFC Bank – have given a negative return of 11%.

Stupendous rally

According to a brokerage firm, PSU stocks over the past 12 months have generated a return of 20-440%. Capital goods, electric utilities, financials and oil, gas & consumable fuels have led the rally in the PSU pack. “There is a positive sentiment for PSU stocks now. Some PSU segments are doing very well like PSU banks where the turnaround is sharp. PSU banks which reported losses of R87000 crore in FY 2018 will be making estimated profits of around R1.3 lakh crore in FY24. Even after the run-up in prices, PSU banks are fairly valued,” said V K, Vijayakumar, Chief Investment Strategist, at Geojit Financial Services. He added that many defence-related PSU stocks like shipbuilders have run up too much too fast on order bookings and the Make In India theme.

This stupendous rally, mostly backed by domestic retail investors, however, has started facing resistance over high valuation and associated risk concerns. Add to it, the overall high valuations of the market have started to creep in. Analysts at Bernstein in a recent note said that the PSU index is expensive, trading at 11.2x fwd PE (price-to-earnings) and 1.8x PB (price-to-book) which is +1SD (standard deviation) to the historical average. However, relative to the broader market (BSE 500), the PSU portfolio is still trading below the historical mean on 12m fwd PE and just slightly above the mean on PB. Industrial PSU stocks are the most stretched, trading at +2.5SD to their 10-year PE average. Typically, PSUs trade at a discount to the market, however, now Industrials PSUs are trading at 35% premium to the broader market. Utilities is the second most stretched PSU sector, trading at 1.5SD levels.