GAIL, HPCL, Coal India, 2 PSU Bank Stocks Top Picks Of Motilal: The Road Ahead For Indian PSUs

Amidst the government's vision of achieving Aatma Nirbhar and Viksit Bharat, Indian PSUs witnessed a turnaround in the financial year 2023-24. Underperforming for a decade, Indian PSUs made a comeback with outperformance in FY24. In brokerage Motilal Oswal's view, strong business narratives and accelerating order book fuelling a re-rating in PSUs. With fundamentals healthy even in FY25, Motilal likes SBI, Coal India, GAIL, HPCL and Bank of Baroda. These are giants in their sector and hold from Maharatna, and Navratna to Miniratna status.

From December 21, 2022, the PSU index skyrocketed by 113% till date, as per the Motilal's data. With that, the market capitalization of the BSE PSU Index has galloped 2.1x to Rs 69.1 trillion, which is more than double the capitalization of Rs 32.5 trillion in the period.

In June 2024, the BSE PSU index price-to-equity ratio expanded to 12.8x from the PE ratio of 8.7x as of December 2022.

Between FY19-24, Indian PSUs earnings witnessed a CAGR of 33.8%, outrunning the private sector sharply which saw a CAGR of 18.6% in the same period.

Data from Motilal Oswal further highlighted that the share of PSUs in the profit pool expanded to 36% in FY24 after hovering in the 17-30% range during the past few years. Further, the earnings of PSUs during FY24 witnessed a spectacular growth of 45% YoY.

That's not all, there has been a massive decline in the PSUs who are making losses over the last five years. Contribution of loss-making PSUs accounted for merely 1% in the profit pool of FY24, compared to the weightage of 18% by the end of FY18.

Moreover, the return on equity of PSUs has recorded a sharp jump to 17.6% in FY24 from the lows of 5.2% in FY18.

Why did PSUs outperform in FY24? In Motilal's view, after a period of weak performance at the start of the past decade, PSUs made a comeback and reported a strong revival in their profits in the previous five years.

Motilal further added, "The government's infrastructure and capex push, which had gained momentum post-pandemic, along with cleaner balance sheet, improved governance, margin tailwinds for commodities, and burgeoning order books, have continued to drive the PSU outperformance and their rerating, in our opinion."

Looking ahead, Motilal stated that the e political stability with Modi 3.0 augurs well for the economy and capital markets as it provides the necessary stability and continuity in policy-making which will likely continue pushing its economic agenda.

Further, in the brokerage's view, the consequent political stability and continuity in policymaking will act like an icing on the cake and keep India as the cynosure of all eyes.

Accordingly, Motilal said, "The profitability of PSUs is likely to improve notably across domestic and global cyclicals, with a sharp turnaround in the fortunes of PSU Banks driving the overall trend. Higher commodity prices over the last two years have strengthened the P&L and balance sheets of Metals and O&G PSUs."

It added, "The government's emphasis on localization, increased capex, and 'Make-in-India' in the defence sector has catalyzed the improvement in the fortunes of Industrial PSUs. Hence, we expect the recovery in PSUs' contribution to earnings and market capitalization to continue."

Hence, Motilal said its preferred PSU ideas are SBI, Coal India, GAIL India, HPCL, and Bank of Baroda.