Jefferies Sees More Legs To PSU Stock Rally, Suggests Top Picks
The outperformance of PSUs, according to the brokerage, is due to earnings per share upgrade and return on equity improvement.
![<div class="paragraphs"><p>The State Bank of India is one of the three choices of the brokerage when it comes to PSUs. (Photo: Vijay Sartape/NDTV Profit)</p></div>](https://media.assettype.com/bloombergquint%2F2023-08%2F0b682d43-60a9-46cb-9aa6-d9684e408ed6%2FSBI_ATM_Mumbai.jpg?rect=0%2C0%2C1280%2C720&auto=format%2Ccompress&w=200)
Brokerage firm Jefferies sees more room on the upside for the public sector stock rally despite the recent correction, citing a 40% discount to Nifty trading valuation among other positive reasons.
The PSU index has outperformed the Nifty by 70 percentage points in the last year after a decade of underperformance prior to 2020, Jefferies said in its note on Wednesday. The rally was partly supported by the government's accelerated capex spends but also sector-specific reasons have helped a change in government stance, it said.
PSU stocks recently have seen some correction, with investors losing around Rs 4.28 lakh crore in three sessions. However, the stocks bounced back on Wednesday, with the Nifty PSU index seeing an over 3% jump.
According to Jefferies, the outperformance of PSUs is due to earnings per share upgrade and return on equity improvement as well.
The government now sees the monetisation of PSUs as a combination of dividends, asset monetisation and stake sales, it said. Jefferies expects improvement in governance to further push the term ratings for PSUs.
The RoEs that had dipped to 4-6% have now improved to 12–13% as profitability has been recovered, it said. The brokerage said that there has also been a large EPS upgrade, with exceptions to Oil and Natural Gas Corp. Ltd., Container Corp. of India Ltd. and Bharat Heavy Electricals Ltd.
"Though PSU index valuations prior to 2012 are not available, our check of valuations suggests that PSU banks, power/coal utilities and select oil and infrastructure companies' multiples over 2006–12 were significantly higher," the note said.
In terms of the banking sector, PSU banks have seen 78% year-on-year growth, with a 70 percentage point growth against the private banks. Lower loan-deposit ratios and bank credit growth have further favoured the PSU banks, it said. The State Bank of India is one of the three choices of the brokerage when it comes to PSUs.
Jefferies looks at Coal India Ltd. as the other choice in the PSU sector, with thermal capacity addition making it a major beneficiary. NTPC Ltd. is another preferred pick, with an expected EPS growth of 10-12%, it said.