SBI, Coal India, and GAIL Among Top 5 PSU Stocks Picked by MOFSL

Public Sector Undertakings (PSUs) have shown remarkable earnings growth, outpacing private sector growth over the past few years, according to Motilal Oswal Financial Services (MOFSL).

PSU Earnings Performance

Between FY19 and FY24, PSUs saw their earnings grow at an impressive rate of 33.8% annually. This is significantly higher compared to the private sector’s annual growth rate of 18.6% during the same period. In FY24 alone, PSU earnings surged by 45% year-on-year, lifting their share in the overall profit pool to 36%, after fluctuating between 17% and 30% in previous years.

Reduction in Losses and Increase in RoE

Over the last five years, PSUs have consistently reduced their losses. The return on equity (RoE) for PSUs jumped to 17.6% in FY24, a substantial increase from a low of 5.2% in FY18.

PSU Stock Performance

PSU stocks performed exceptionally well in FY24, with the PSU index increasing by 92.4%, far outpacing the benchmark index’s 28.6% rise. This trend continues in FY25, with the PSU index up by 18% compared to a 5.5% rise in the benchmark index.

Factors Driving PSU Growth

MOFSL highlights several factors behind the growth of PSUs:

• Commodity Prices: Higher commodity prices in the past two years have strengthened the financials of Metals and Oil & Gas PSUs.
• Government Policies: Policies promoting localisation, increased capital expenditure, and the ‘Make-in-India’ initiative, particularly in the defence sector, have boosted Industrial PSUs.
• Economic Environment: A stable political environment with a focus on manufacturing, capital expenditure, and infrastructure has created favourable conditions for growth.

MOFSL expects the profitability of PSUs to continue improving, driven by domestic and global cyclical trends, especially with the strong turnaround of PSU Banks.

Future Outlook

MOFSL believes that PSUs’ current earnings momentum and the optimistic outlook will sustain their valuation premiums in the near term. However, it cautions that the high valuations and recent sharp gains in some PSU stocks mean that actual earnings delivery versus guidance will be crucial.

Valuation and Economic Context

India is currently experiencing a favourable economic phase with solid macroeconomic indicators, strong corporate earnings, and a focus on manufacturing and infrastructure. The political stability with the current government provides continuity in policy-making, which is beneficial for the economy and capital markets.

PSU Earnings Forecast

For the PSUs covered by MOFSL (which account for about 55% of the market capitalisation of Indian PSUs), earnings growth from FY24 to FY26 is expected to slow to 6%, largely due to conservative margin expectations for Oil & Gas. Excluding Oil & Gas, earnings growth is projected to be 15%, with significant contributions from the BFSI (Banking, Financial Services, and Insurance) and Metals sectors.

Top PSU Stock Picks by MOFSL

1. State Bank of India (SBI)
2. Coal India
3. GAIL India
4. Hindustan Petroleum Corporation Ltd (HPCL)
5. Bank of Baroda

These recommendations are based on the strong performance and positive outlook of these companies in their respective sectors.