22.50-1,130% Dividends: SBI, NTPC, Coal India, Jefferies' Top PSU Picks Here!

Public Sector Undertakings (PSUs) have been popping off the charts, emerging as multi-baggers since last year. Indian PSUs are investors' darling both domestically and overseas. And the mind-boggling part is that they're still trading at a discount, and has a potential of 15% further upside. Amidst this, Jefferies' top PSU picks are giants like State Bank of India, NTPC, and Coal India. Jefferies has also recommended buying on Power Grid. These PSUs are also among the top dividend-paying stocks.

According to Jefferies, PSU (Public Sector Undertakings or SOE) index 70ppt outperformance vs. Nifty over the past 12 months, comes after a decade of underperformance prior to 2020. Recent outperformance has been helped by EPS upgrades & RoE improvement.

Jefferies added that the index still trades at a 40% discount to Nifty, which offers a 15% rerating potential to the average level. A change of stance from the Gov towards 'value maximisation' for SOEs could take it above average.

Explaining further in detail, Jefferies said, "PSU (or SOE) Index OPFed Nifty by 40ppts in CY23 and another 15ppt YTD. Stocks across the PSU spectrum have rallied, partly supported by the government's accelerated capex spending but also sector-specific reasons have helped. Despite this outperformance, the PSU Index PE at 12.1x is a 40% discount to Nifty vs. the pre-FY18 discount to Nifty PE of 31% on average. Though PSU index valuations before 2012 are not available, our check of valuations suggests that PSU Banks, power/coal utilities and select oil & infra cos multiples over 2006-12 were significantly higher."

Further, PSU fundamentals have continued to improve. Jefferies added that PSU RoEs had dipped from 14-15% level to 4-6% primarily due to the drag from PSU banks among others. The overall RoEs have improved back up to 12-13% as the profitability has recovered and should improve further. Most PSUs have also seen large EPS upgrades with notable exceptions being ONGC, Concor and BHEL.

Not just that their governance has also bettered. According to Jefferies, in the Feb 24 budget, and subsequent commentaries from Ministry of Finance officials, the govt. has publicly talked of a positive change of stance towards value maximisation for the PSUs. A change has already been seen here over the last 5 years with the govt. shifting away from the ETF mode of PSU stock disinvestment.

Jefferies added, "Govt. now sees monetisation of PSUs as a combination of dividends, stake sales and asset monetisations. PSU's top management performance also now has a component of stock performance. Governance improvements could drive longer-term rerating for SOEs."

Accordingly, Jefferies said, "Our top PSU Picks are SBI, Coal India and NTPC." It further added, "NTPC (Buy) expected EPS growth of 10-12% is higher than Power Grid (Buy) single digit EPS growth and remains our preferred pick. However, going by the 2006-12 example, both have further rerating potential. Also, with thermal capacity addition planned, Coal India should be another major beneficiary as a coal supplier to thermal plants. India has ample coal reserves, but the mining activity needs a step up to meet the demand. Last 3 years volume growth was c.10% cagr. If this is repeated over the next 2, it would be a positive surprise. The stock still looks cheap at 8.3x Mar'25E PE and 6% div yield."

All four stocks have paid hefty dividends since last year.

Coal India: The world's largest government-backed company, Coal India has announced a second interim dividend of Rs 5.25/- per equity share or 52.5% on the face value of Rs 10/- for FY24. The company turned ex-dividend on February 20, 2024, and will carry its payout on March 12, 2024. Earlier, the company paid its first interim dividend of 152.5% amounting to Rs 15.25 per share for FY24. Meanwhile, in the previous financial year 2022-23, Coal India paid up to 242.50% dividend aggregating to Rs 24.25 per share.

Power Grid: The company turned ex-dividend on February 15 for its upcoming second interim dividend of Rs. 4.50 per equity share of Rs. 10/- each (@45% of the paid-up equity share capital) for the Financial Year 2023-24. The 2nd Interim Dividend shall be paid to the Members on 5th March 2024. Earlier, the company paid its first interim dividend of 40% amounting to Rs 4 per share for FY24. In the financial year 2023-24, the CPSE paid a whopping 187.50% dividends valuing to Rs 18.75 per share.

NTPC: Meanwhile, this powerhouse turned ex-dividend on February 6th for its second interim dividend at the rate of 22.50% amounting to Rs 2.25 per share on the face value of Rs 10 each for the financial year 2023-24. The date of payment/dispatch of the dividend was 22 February 2024. Earlier, NTPC paid its first interim dividend of 22.5% amounting to Rs 2.25 per share for FY24. In the financial year 2022-23, the company paid dividends up to 72.50% amounting to Rs 7.25 per share.

SBI: Unlike the above three PSUs, SBI has not declared any dividends so far in 2024. However, last year, it paid dividends up to 1,130% aggregating to Rs 11.30 apiece. Currently, it has a dividend yield of 1.48%.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.