PSU Stocks in a Micro-Bubble: How Will BHEL, Cochin Shipyard, and the PSU Index React Post Union Budget?

Even investing legends can make mistakes. Benjamin Graham, known as the ‘father of value investing,’ faced challenges similar to what investors face today. In the 1920s, Graham tried to profit in a booming market by buying undervalued stocks and short-selling overvalued ones. However, he learned that stock prices often move together in groups, making it hard to pick winners and losers.

This idea was later supported by Charles D. Ellis in his book Institutional Investing. Ellis found that most stock price changes are driven by sector trends rather than individual company performance. This brings us to a current trend on Dalal Street: public sector undertakings (PSUs).

The Rise of PSUs

PSUs, once known for inefficiency, have become major wealth creators. The 56 listed PSUs in the BSE PSU index made a combined profit of over ₹5 trillion in 2023-24. Public sector banks, previously struggling with bad loans, saw profits soar to ₹1.4 trillion, a four-fold increase in three years.

Government initiatives like ‘Make in India’ and increased capital expenditure (capex) have boosted PSUs. The government’s budgeted capex rose from ₹1.9 trillion in 2013-14 to ₹11.1 trillion in 2024-25. PSUs’ own capex increased from ₹2.6 trillion in 2013-14 to ₹3.4 trillion in 2024-25, though it peaked at ₹6.4 trillion in 2019-20.

Market Performance

Over the past year, the market value of listed PSUs in India jumped from $404 billion to $804 billion. The BSE PSU Index delivered over 100% returns. For example, investing ₹1 lakh in Cochin Shipyard Ltd a year ago would now be worth ₹8.32 lakh—a 732% return.

Analyst Opinions

According to Manish Bhandari, CEO of Vallum Capital Advisors, PSUs benefited from the government’s focus on capex. This theme led to a re-rating of PSU stocks, increasing their price-to-earnings (PE) multiples. Harshad Borawake from Mirae Asset Investment Managers added that after a decade of underperformance, PSUs have improved profitability and capital structure, justifying their recent re-rating.

The Bubble Question

However, Kotak Institutional Equities warns that some PSU stocks may be overvalued. For instance, Bharat Heavy Electricals Limited (BHEL) saw its market cap rise by ₹77,800 crore, but the entire industry’s profit potential is much lower. Cochin Shipyard’s market cap increased by ₹67,300 crore in the past year, which is unrealistic given its actual profit potential.

Disinvestment Opportunity

The government might use the current market enthusiasm to push for disinvestment, potentially raising ₹11.5 trillion. This could boost economic growth and benefit investors in the long run.

While PSU stocks are performing well, experts caution against short-term momentum investing. Long-term investors should consider whether current valuations reflect true future growth. The recent surge in PSU stock prices may not be sustainable, and investors should weigh their options carefully.