Will PSU Rally Still Continue in Modi 3.0?

Public sector undertakings (PSUs) have been on a rollercoaster in 2024. After a surprise crash in early June sparked by political uncertainty, quality PSU stocks staged a dramatic comeback within weeks. Read on to learn the driving factors behind this volatility and assess the investment merits of PSU stocks as PM Modi embarks on his third innings.

Decoding the Shock Crash and Swift Rebound in PSU Stocks

The PSU sell-off was triggered by the BJP falling short of a majority despite being the largest party, requiring coalition support. This raised concerns that the policy focus and reforms facilitating PSU growth over the past five years – including divestment, empowered leadership, and capital allocation – may be jeopardised under strained coalition politics. 

Fears of potential populist measures threatening fiscal prudence also emerged. However, the decline quickly reversed as PM Modi took oath supported by a numerically strong NDA, while FM Sitharaman was reappointed, signalling continuity. 

Moreover, historical data shows PSU stocks have delivered competitive returns even under previous coalition governments led by Vajpayee, Gowda, and Modi, soothing investor nerves.

Key Factors Aiding a Constructive PSU Outlook Under Modi Regime 3.0 

The importance of PSUs remains undisputed as the government sharpens its focus on infrastructure expansion, indigenous manufacturing, renewable energy, and defence production through initiatives like Make in India and Atmanirbhar Bharat. Across these priority areas, the involvement of public sector undertakings remains indispensable, given their execution capabilities nurtured over decades. 

Several reforms since 2014 have enhanced efficiency, transparency and governance standards across various PSU categories, improving their ability to navigate economic cycles. Resolution of balance sheet issues has also enabled leading PSU banks and commodity producers to stage earnings recovery just as the economy embarks on an upturn, unlike losing steam mid-way through past growth phases.  

The continuity of top leadership implies the modified NDA coalition will likely stay the course of broader reforms over the past five years. Even if the pace slows, policy reversals look unlikely, offering reasonable clarity on strategic priorities and the operating environment for domestic PSU majors over the next five years.

Attractive valuations selectively across PSU categories also bolster their investment case after the steep June correction, particularly in the banking and metals space. Overall, analysts largely concur that PSU stocks seem better positioned relative to previous market swings to deliver a competitive performance through volatility cycles on the back of more robust fundamentals, valuations, and earnings stability.

Performance of PSU stocks under coalition governments 

Historical data challenges the notion that PSU stocks underperform when stable single-party majority governments are absent at the centre. During Deve Gowda’s brief tenure as PM, PSU stocks delivered 33% returns versus 19% for Nifty. From 2004 to 2014, under UPA-1, PSUs posted 300% returns matching Nifty despite economic challenges. More recently, in Modi’s second term from 2019-2024, requiring NDA coalition management, the PSE index outperformed Nifty 50 with 32% returns versus 27%.

Attractiveness Across PSU Categories as Focus Shifts towards Implementation 

As the new government shifts focus towards implementation and last-mile delivery, PSUs across sectors are gaining attractiveness owing to their revenue visibility and balance sheet strength, as follows:

Industrials: Analysts are overweight on defence manufacturers like BEL, Mazagon Dock, and HAL; commodity majors including SAIL, NMDC, and MOIL; logistics players such as Concor and Shipping Corporation; and power and construction names such as BHEL and NBCC, indicating their order book potential.

Energy: Market leaders in the oil and gas space, such as ONGC, Indian Oil Corp, BPCL, and PowerGrid, and coal miners, such as Coal India, are recommended owing to revenue visibility from improving domestic fuel consumption.

Financials: Banking giants, including SBI and PNB, that have undertaken balance sheet repair offer deep value. Scope for gains is also seen in insurance behemoth LIC and housing lenders.  

Consumption: As the economy grows and the government sharpens its focus on improving last-mile delivery, distribution-focused PSUs in fertiliser, power, and fuel stand to immensely benefit from serving India’s large population.

Consider Investing Through PSU Mutual Funds

While investing directly, retail investors should avoid punting on smaller volatile PSU names and focus on quality large-cap PSUs with demonstrated earnings resilience. 

However, equity mutual funds like Aditya Birla Sun Life PSU Equity Fund offer a professionally managed portfolio across market caps for diversified PSU exposure. These funds expose the best PSU stocks while taking cash calls during volatility. 

For long-term investors willing to accept some interim volatility, adding PSU equity mutual funds now can aid portfolio returns over the next five years. Alternatively, index mutual funds tracking PSU indices offer low-cost, diversified access.

Conclusion

Despite near-term uncertainty skewing market dynamics, improving financial health and industry leadership across diverse sectors place several PSU stocks in a favourable light for long-term investors. Attractive valuations amidst earnings growth visibility selectively make a compelling case for PSUs to deliver healthy returns through market ups and downs over the next decade as India enters a new economic growth phase.

Disclaimer: This is a syndicated feed. The article is not edited by the FPJ editorial team.

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