Listed public sector businesses might now be turning the web page, immediately after a decade of underperformance, to emerge as eye-catching investment possibilities. Domestic brokerage and study firm Edelweiss believes that as the atmosphere turns reflationary and valuations stay at a discount, the fortunes of PSU stocks could transform. “PSUs have been value traps in 2010s (flat for decade) in stark contrast to being value creators in 2000s (10x in 10 years),” Edelweiss Securities stated in a note. PSU stocks underperformed in the course of the prior decade due to ballooning debt and hurt by the government’s pro-cyclical fiscal policy.
What’s altering for PSU stocks?
Moving away from the deflationary trend could advantage the PSU stocks. “With commodity price rally broadening now to oil prices and demand recovery underway, it augurs well for PSU profitability and stock performance. Historically, during commodity price rise, PSU stocks have delivered very strong returns, with their earnings tending to do better than that of Nifty,” they stated. Further, PSU companies’ capex might have peaker, according to Edelweiss. Capital work in progress (as % of gross block) appears to have peaked out and is now trending reduced, suggesting a lot of assets now coming on stream. “With capex cycle peaking and improving cash flows, there is significant deleveraging potential for equity investors. Thus, PSUs present large operating and financial leverage potential to capitalise on the changing macro environment,” they added.
PSUs, except banks, could also get an edge for operating in oligopolistic sectors. In most industries (ex-banks), their elevated industry shares have remained broadly intact. Hence, altering atmosphere can speedily lead to a bounce in these franchises,” the note stated. PSUs have 83% industry share in the coal sector, 88% in fuel retailing, 40% in energy transmission, and 75% in oil exploration.
To leading it all PSU stocks are out there at eye-catching valuations. Currently, PSUs (ex-financials) are trading at a record 60% discount to Nifty. Edelweiss highlighted in 2011 these traded at a mild premium. “While we are far away from the business cycle vibrancy seen in 2011, we believe such large valuation discount for strong franchises (as most are present in oligopolistic industries) is unjustified,” Edelweiss stated.
Investable themes
Edelweiss has classified PSUs into 3 categories structural stories, cyclicals, and balance sheet improvement. Among the structural stories, the brokerage firm believes city gas distribution businesses with the energy of pricing and restricted competitors could advantage going ahead. Along with these, Container corporation is also seen as a structural story. “In India, the share of railway freight is significantly lower than that of roadways–one of the bottlenecks for manufacturing. However, things are likely to change on this front with the commissioning of the Western Dedicated Freight Corridor (DFC),” they added.
In the cyclical space, oil advertising and marketing businesses are anticipated to advantage from powerful refining and advertising and marketing margins. They added that advertising and marketing margins are at present on a structural upswing and present higher levels need to sustain. Further upstream oil and gas corporations such as GAIL and ONGC — each deep cyclicals are believed to supply worth at present costs.
Banking on improvement in balance sheets, Edelweiss Securities has picked utilities as the least expensive way to play industrial recovery. Banks have also made the reduce in this theme as analysts count on a turning corporate cycle to advantage PSU banks with their powerful buffers.
(The stock suggestions in this story are by the respective study and brokerage firms. TheSpuzz Online does not bear any duty for their investment assistance. Please seek advice from your investment advisor prior to investing.)