Down but not out! 4 reasons why you shouldn't write off PSU stocks yet

Initially investors were apprehensive that the premium PSU stocks enjoyed due to BJP's ability to make structural reforms and decisions swiftly will go away as coalition partners may not give PM Modi a free hand over such decisions. But now the focus is now back to fundamentals.

Also read |

Here are 4 key reasons why investors are not willing to turn their back on PSU stocks:

1) Turnaround in PSU banks

The sharp 190% rally seen in Nifty PSU Bank stocks in the last 2 years has been a structural story and not just driven by a narrative as these lenders have left asset quality issues behind, are well-capitalised and even growing almost as much as their private sector counterparts.

Vikas Khemani of Carnelian Asset Management points out how the government has addressed 3 structural problems of PSU banks - asset quality, technology, and governance.

"Asset quality has been very well addressed. We have very good high-quality CEOs at the top and they are given full freedom to transform the banks and run them without interference. And lastly, most PSU banks have invested significant amounts in technology," he said.

Motilal Oswal's Rahul Shah is of the opinion that PSU banks will outperform private banks as their quarterly numbers were also stronger.

2) Growth outlook largely unchanged

Although there is a belief that coalition dharma may force the Modi government to increase populist welfare measures, the growth outlook in government capex-linked sectors remain largely unchanged till we have better clarity in the Budget next month. The government's decision to keep the same faces of BJP to lead key ministries like Defence, Home Affairs, Road Transport, Finance and External Affairs has kindled hopes that there will be no disruption in agenda.

The government’s emphasis on infrastructure, housing, energy transition, and manufacturing is seen as an opportunity for both private and public sector companies.

"In power and oil & gas sectors, we feel that there shouldn’t be any major change in stance plot," Tata Mutual Fund said.

3) Valuation comfort

While PSUs may be trading above their own historical average PE multiples, analysts point out that the valuations are much more reasonable as compared to their private counterparts.

"Wealth is going to get created in the PSU space over the medium to long term. The market rewards growth and the margin of safety is there when multiples are lower," Manish Sonthalia, Chief Investment Officer of Emkay Investment Managers said.

4) Dividend yields

Some PSUs are offering dividend yields between 5-6% even after the rally. "There is a case for re-rating in PSU space even from these levels. When you have growth, valuations and dividend yield comfort, that is the best recipe for value investing," Sonthalia said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)