Over the past year, shares of Public Sector Undertaking (PSU) companies have outperformed the Nifty index. This marks a significant shift after a decade of underperformance. Additionally, reports from global investment banking firm Jefferies suggest that the rapid improvement in EPS and RoE has contributed significantly to this momentum. Consequently, the BSE PSU index has outperformed the Nifty 50 by 70% in the past 12 months alone. Notably, during CY2023, the PSU index outperformed the Nifty by 40%, while as of mid-February 2024, it surpassed the Nifty by 15%.
Let’s delve into the reasons behind the enhanced performance of PSU stocks in 2023 and explore whether this trend will persist.
What’s Happening?
According to Mint, there has been consistent bullishness in PSU shares lately. The BSE PSU index exhibited a growth of 55% during 2023, compared to a mere 18.74% growth in the BSE benchmark index Sensex. Additionally, as reported by The Business Line, one out of every three stocks included in the BSE PSU saw returns of over 100% during CY2023.
Looking at 2024, as of February 19th, the BSE PSU index has grown by 21.26%. Furthermore, Oil India has provided returns of 59.67% by the same date, while Coal India has yielded returns of 22.61% during this year.
So, what has transformed the once-underperforming PSU stocks into lucrative options for investors? Let’s attempt to understand the underlying reasons.
Factors Behind the PSU Stock Rally
Market movements, whether bullish or bearish, are never without reason. There are always underlying factors driving such trends, and the outperformance of PSU stocks is no exception.
Government Support: The government’s efforts to bolster infrastructure development across sectors like electricity, roads, railways, and housing have indirectly benefited PSU companies. These firms received substantial orders, leading to improved business prospects and a visible impact on the stock market.
Increased Capital Expenditure by the Government: Apart from sector-specific reasons, another factor contributing to the rally in PSU stocks is the government’s increased capital expenditure.
Attractive Valuations: According to Jefferies’ report, PSU stocks are trading at a 40% lower valuation compared to the Nifty index, which has attracted some investors.
What it Means for Investors?
The recent uptick in PSU stocks presents a potential opportunity for investors. However, it’s crucial to make informed decisions:
Uncertain Future: The government’s policies may continue to shape the trajectory of PSU stocks, but there are no guarantees. Investors should be wary of the uncertainty surrounding future developments.
Company Performance: Not all government companies perform alike. Conduct a thorough analysis of a company’s past performance and future prospects before investing.
Diversification: Maintain a diversified portfolio. Dependence solely on PSU stocks may expose investors to undue risks.
What’s Next?
Market insiders believe that the rally in PSU shares is far from over. Factors such as government policies, economic reforms, and attractive valuations could continue to support these stocks in the future, fostering hopes for sustained growth in the PSU sector.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The companies mentioned in the article are for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
