Powerful valuation, government focus

The ongoing rally in the PSU stocks grabbed everyone s attention on Dalal Street in the current calendar year thanks to attractive valuation and the government focus on the sector. Data shows that as many as six public state-owned companies rallied more than 100 per cent on a year-to-date basis to December 2, while 23 firms were somewhere between 27 per cent and 90 per cent.

Mazagon Dock Shipbuilders came as the top gainer in the list with a rally of 227 per cent. The company's shares went up to Rs 914.10 on December 2, 2022, from Rs 278.90 on December 31st, last year. Over the same period, Bharat Dynamics, Hindustan Aeronautics, Rail Vikas Nigam, Bank of Baroda and Indian Bank also gained 100 per cent.

What kept the momentum upbeat?

Equity 99 said that the government s commitment to increase manufacturing locally supported defence stock through PLI incentives, as well as by the production-linked market strategist and head of research. The sentiment for select PSU stocks was high because of the higher outlay in infrastructure and subsidy for fertilisers. The major relief comes from an improvement in the non-performing assets NPA corporate loan book and operating performance, which leads to healthy growth in book numbers. Union Bank Of India up 89 per cent Cochin Shipyard up 86 per cent Bank Of India up 65 per cent Rashtriya Chemicals and Fertilizers up 56 per cent Coal India up 55 per cent Bharat Heavy Electricals up 52 per cent and Indian Railway Finance Corporation up 51 per cent as a major gainer in the PSU space in 2022 to date.

Market watchers believe that the coming budget will create a path ahead for the sector. Sharma, of Equity 99, believes that the defence sector is still attractive. Atmanirbhar is in defence, which promotes local arms production and capital allocation for domestic procurement boosting the industry. Increased arms exports from India are further improving market sentiment this year. Equinomics Research and Advisory said that 2023 would be stock specific within the PSU space, and that G Chokkalingam, founder, Equinomics Research and Advisory said. Growth opportunities for specific business models and possible sale of equity by the government would drive the rally. The possibility of the strategic sale of PSUs engaged in metals and logistics could be part of the rally. In 2022, some metal players, including National Aluminium, Steel Authority of India and Hindustan Copper, retreated between 4 per cent and 23 per cent YTD. Oil and gas players such as BPCL, HPCL and Gujarat Gas also lost 12 per cent, 21 per cent and 19 per cent in 2022, respectively.

Chokkalingam believes that metals and logistic PSUs can't participate in the rally. They are very attractive now. Most industrial houses are expanding their logistics business. They could possibly get a lot of stakes in these PSUs from the government. The metal sector, especially copper and aluminium, could improve their prices early next year as the global economy is expected to improve its growth from mid- 2023. He said metal PSUs look attractive now, and that they could be avoided from oil and gas PSUs because both steep rise and fall would be negative for them.