Mint Primer: Is the market’s PSU narrative overstretched?
₹3.94 trillion. PSUs are asset rich for one. There’s been favourable revaluation of these assets (land, plant and machinery) given the exorbitant cost of replacing these at current prices.
Order books have grown from government spending and operational efficiency has improved too. The government has budgeted for a capex of ₹11.11 trillion in FY25, up 11.1% from the record capex of ₹10 trillion targeted at infra and energy sectors, etc. This has seen PSU bank and power stocks rally furiously in the last one year.
SBI is up 47% over a year at a record closing high of ₹771 and NTPC up a whopping 94% at ₹336.1. In the fiscal year so far, the trailing price-to-earnings multiple of the PSU index has risen 48% to 13.74 times. While the index price doubled, its earnings per share (EPS) expanded 35% to ₹1,376.
It shows that valuations have risen not only because of price growth but also due to earnings growth. Interestingly, the current PE is below the historic median of 14.15 times. In the current fiscal the top 10 stocks that have contributed to 54% of the PSU index rally (5,081.37 out of 9,421 points) include SBI, NTPC, Power Grid Corporation, Coal India and ONGC.
(Not because of dividend but you can add this if it suits )Traditionally dividend paying PSUs generated low returns on equity -- net income /shareholders equity plus free reserves --but with expectations of profits growing due to improved operational efficiency the RoE is also expected to improve . Coal India whose current dividend yield stands at 5.6% has an RoE of 56% which could improve further . While earnings have risen alongside prices, further upside will hinge on how earnings play out in the coming quarters.
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