PSU Market Cap Grows Nearly Threefold As Bulls Take Centre Stage

Public sector undertakings have seen a phenomenal run in valuations over the last five years as robust earnings, improved corporate governance, and a government push to build infrastructure and manufacturing capabilities lend a fillip to companies' operational performance and order book.

Recently, the National Stock Exchange added defence equipment-maker Bharat Electronics Ltd. to the widely-tracked benchmark Nifty 50 index. The revision will be effective from Sept. 30. This will take the number of PSUs in the index to eight.

The weightage of PSUs in Nifty 50 has increased from 8.02% in September 2019, to 9.53% now. It will further rise after BEL's entry into the benchmark index.

Besides, UK's FTSE has also added Bank of Maharashtra Ltd., Bharat Dynamics Ltd., Central Bank of India Ltd., HUDCO Ltd. and Cochin Shipyard Ltd. to its All-World Index.

The PSU basket's heft has increased in the market, as evidenced by the boom in valuations. The market capitalisation of 55 companies in the BSE PSU index went past Rs 70 lakh crore in June.

The market cap of key barometer Nifty PSE index has grown 272% since 2019, compared to 136% surge in Nifty 50.

Financial sector firms like banks and insurance companies have the largest share in the total PSU market cap. It is followed by energy and utilities, defence and railway. The past one year has seen the last two themes drawing high investor attention as companies in the space bag new orders to keep them occupied for years.

The government’s emphasis on localisation, increased capex, and ‘Make-in-India’ in the defence sector has catalysed the improvement in the fortunes of industrial PSUs, Motilal Oswal Financial Services Ltd. said in a note in June. "Hence, we expect the recovery in PSUs’ contribution to earnings and market capitalisation to continue."

Earnings momentum is fueling the outperformance and the valuation premiums for PSUs are expected to sustain in the near term, the brokerage said.

The surge in stock prices have led 21 companies to boast a market cap more than Rs 1 lakh crore. Other than legacy heavyweights like State Bank of India, Life Insurance Corp. and Oil and Natural Gas Corp., companies like Hindustan Aeronautics Ltd. and Rail Vikas Nigam Ltd. has seen their value jump over 10 times.

The trillion-rupee club now includes companies from the defence and railway pack. Five years ago, it was only financials and power and energy companies.