Most PSU stocks are running out of steam. These are the exceptions.

Oil & gas PSUs are in a stronger position than those in defence, heavy engineering, railway and banking, where retail euphoria persists for now. Image: Pixabay
Oil & gas PSUs are in a stronger position than those in defence, heavy engineering, railway and banking, where retail euphoria persists for now. Image: Pixabay

Summary

  • After a euphoric rally, more than 30 of the 59 companies in the BSE PSU Index are in or close to bear territory, including investor favourites such as BEML, Cochin Shipyard and Bharat Dynamics. Read on to find out which ones are holding strong and why.

A rising tide lifts all boats, as the saying goes. India’s post-pandemic economic growth and a huge capital expenditure push from the government caused the valuations of public sector unit (PSU) stocks to surge to exorbitant levels.

Now, more than 30 of the 59 companies in the BSE PSU Index are in or inching towards bear territory (20% below their 52-week highs), including investor favourites such as BEML, Cochin Shipyard and Bharat Dynamics.

But while most PSU stocks are running out of steam, some big names are bucking the trend. These include Coal India, NTPC, Hindustan Petroleum Corporation, Oil and Natural Gas Corporation and a few others in the power and oil & gas sector. Their stocks have fallen around 1-7% from their 52-week highs, while the index is down 5% from its 52-week high.

Also read | Earnings vs expectations: Have PSU stocks become uninvestable?

“These are all old-economy stocks, which typically do well when the overall economy starts doing well," Charanjit Singh, fund manager at DSP Mutual Fund told Mint. “There was a major push from the government to improve their performance, which boosted their valuations."

When investors realised that PSU stocks were undervalued, a major re-rating ensued, sparking a bull run in the sector. But optimism turned into exuberance, and the stock prices of these companies raced ahead of their fundamentals, barring a few.

Power play

India's peak power demand was 250 GW as of May 2024, breaking the previous record of 243 GW set in September 2023. The government now expects peak power demand to hit 400 GW by 2031-32, which is higher than the previous projection of 384 GW. This rapid increase is due to rising per-capita consumption, which has grown at an average rate of almost 7% over the past five years.

“Demand for power is accelerating, which bodes well for the power sector. Power will be in the game for the next 8-10 years," Singh told Mint. “However, we have not built enough capacity, and the biggest driver of power stocks is their ability to add more capacity. As more capacity additions are announced the stocks will undergo re-ratings."

Against this backdrop, both NTPC and Coal India are well-positioned to deliver India’s energy needs, analysts told Mint.

Also read: Centre to auction another 50 commercial coal blocks in FY25

NTPC, the country’s largest power generator, has an installed capacity of 76 GW as of Q1FY25. The company has planned capex of around 7 trillion over the next seven years in its quest to achieve a capacity of 130 GW, including 60 GW from renewable energy. It currently has 21 GW of capacity under construction, including thermal, hydro, and renewable power plants. Its strong capacity-addition trajectory and aggressive foray into renewables will drive good financial performance in the medium to long term, according to an ICICI Securities report.

Similarly, Coal India, a ‘Maharatna PSU’ and the world’s largest coal producer, remains a primary energy producer for India, supplying 55% of the country’s energy needs and 70% of its electricity needs. It aims to produce one billion tonnes of coal by FY26 to support the government’s goal of 24x7 power supply. For this, the company has planned capex of 1.3 trillion for 119 projects with a capacity of 896 million tonnes.

Analysts told Mint that NTPC and Coal India have the balance sheets and capabilities to execute their projects. Significant institutional holding and growth potential have kept these stocks anchored to their fundamentals and prevented them from overheating.

Competitive advantage

PSUs in the oil & natural gas sector have a different story to tell. Volatile crude oil prices, limited pricing power, and low net crude realisation led to a dismal earnings season for both oil marketing and oil and gas exploration PSUs in Q1FY25.

Crude oil prices largely hovered around $80 a barrel over the quarter and state-owned oil marketing companies had no power over the retail prices of petrol and diesel ahead of the general elections. In fact, 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 ate away at their profits. Low crude oil realisation and tepid oil and gas production also reduced the net profit and revenue of these companies.

Also read: ONGC investors need faster production ramp-up from KG basin

However, despite missing analyst estimates for Q1, the stocks of Bharat Petroleum Corporation, Hindustan Petroleum Corporation, Oil and Natural Gas Corporation and Oil India have managed to hold steady in comparison to those in the defence or banking sector. Analysts said this was because these big players were more competitively positioned than their counterparts in other sectors.

BPCL and HPCL have a huge distribution advantage over private oil marketing companies, while ONGC expects to realise its full oil and natural gas production capacity at the Krishna Godavari basin by Q4. The demand outlook for crude oil and its refined products also remains strong, with electric vehicle penetration yet to reach meaningful levels in India, analysts said.

Moreover, “leading up to the elections and budget, investors were increasingly concerned about potential government populist measures that could severely impact the financial health of OMC PSUs," Trideep Bhattacharya, president and chief investment officer of Equities at Edelweiss Mutual Fund told Mint. "However, with no such measures announced, investors' worst fears did not materialise."

All these factors place oil & gas PSUs in a stronger position than those in defence, heavy engineering, railway and banking, where retail euphoria persists for now.

"PSUs lacking strong competitive positioning that have been re-rated over the past 15 months due to favorable market conditions may face greater profit-taking and de-rating in the future," Bhattacharya said. “A more nuanced approach to PSUs will be essential moving forward."

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