Most PSU Stocks Losing Steam, But Coal India, NTPC, and ONGC Defy the Trend

Many Public Sector Undertaking (PSU) stocks have recently lost momentum. Over half of the 59 companies in the BSE PSU Index are either in or approaching bear territory, which means their stock prices are at least 20% below their 52-week highs.

This includes popular stocks like BEML, Cochin Shipyard, and Bharat Dynamics. However, some PSU stocks are holding strong, particularly those in the power and oil & gas sectors. These companies, including Coal India, NTPC, Hindustan Petroleum Corporation, and Oil and Natural Gas Corporation, have only seen their stocks drop by around 1-7% from their peaks, while the BSE PSU Index is down 5% from its 52-week high.

Government Push and Investor Re-Rating

According to Charanjit Singh, a fund manager at DSP Mutual Fund, these are traditional “old-economy” stocks that usually perform well when the broader economy is doing well. The government has pushed for better performance from these companies, which has increased their stock values. When investors noticed that PSU stocks were undervalued, it led to a significant re-rating, causing a bull run in the sector. However, the stock prices of some companies outpaced their actual financial performance, leading to a correction.

Power Sector Outlook

In the power sector, India’s peak power demand reached 250 GW in May 2024, surpassing the previous record of 243 GW set in September 2023. The government now expects peak power demand to reach 400 GW by 2031-32, up from an earlier projection of 384 GW. This growth is driven by increasing per-capita consumption, which has grown by nearly 7% annually over the past five years. This trend is expected to benefit power companies like NTPC and Coal India.

NTPC’s Expansion Plans

NTPC, India’s largest power generator, has an installed capacity of 76 GW as of the first quarter of FY25. The company plans to invest ₹7 trillion over the next seven years to increase its capacity to 130 GW, including 60 GW from renewable energy sources. NTPC currently has 21 GW of capacity under construction, including thermal, hydro, and renewable power plants. Analysts believe that NTPC’s strong capacity-addition trajectory and aggressive foray into renewables will drive good financial performance in the medium to long term.

Coal India’s Strategic Role

Similarly, Coal India, the world’s largest coal producer, plays a critical role in meeting India’s energy needs, supplying 55% of the country’s total energy and 70% of its electricity needs. Coal India plans to produce one billion tonnes of coal by FY26 to support the government’s goal of providing 24×7 power supply.

For this, the company has planned capex of ₹1.3 trillion for 119 projects with a capacity of 896 million tonnes. Analysts believe that NTPC and Coal India have the balance sheets and capabilities to execute their projects effectively, and their stocks have remained anchored to fundamentals despite broader market corrections.

Challenges in the Oil & Gas Sector

In the oil & gas sector, companies like Bharat Petroleum Corporation, Hindustan Petroleum Corporation, Oil and Natural Gas Corporation, and Oil India have faced challenges due to volatile crude oil prices, limited pricing power, and low crude oil realizations. These issues led to a poor earnings season in the first quarter of FY25 for both oil marketing and oil and gas exploration PSUs.

Crude oil prices hovered around $80 per barrel during the quarter, and state-owned oil marketing companies were unable to control retail prices of petrol and diesel ahead of the general elections. A ₹2-per-litre cut in petrol and diesel prices reduced their gross refining margins, while a ₹100-per-cylinder subsidy in LPG prices under the Ujjwala scheme impacted their profits. Despite missing analyst expectations for the quarter, these companies’ stocks have remained relatively stable, thanks to their strong market positions.

Competitive Advantage of Oil & Gas PSUs

Analysts believe that these oil & gas PSUs have a competitive advantage over their peers in other sectors. BPCL and HPCL, for example, have a significant distribution edge over private oil marketing companies. ONGC is expected to fully realize its oil and natural gas production capacity at the Krishna Godavari basin by the fourth quarter.

Despite concerns about potential populist measures affecting these companies’ finances, such measures were not introduced in the recent budget, easing investor worries.

Outlook for Other PSUs

In contrast, PSUs in the defense, heavy engineering, railway, and banking sectors might face more profit-taking and a greater re-rating in the future, particularly if they do not have strong competitive positions. Moving forward, a more nuanced approach to investing in PSUs will be necessary.