Decoding PSU Index: Post-COVID Rally To Continue After Elections? Top Stocks To Bet

PSU stocks have been the rage in the stock market for the past few years. In the previous three years, the NIFTY PSU index climbed by 212% and by 110% last year. For the past ten to fifteen years, the PSU index has been stagnant broadly. PSU stocks such as banks, defense, OMCs, and power have experienced a staggering rise in value for investors. This surge has a number of causes, including government expenditure, investor sentiment, the reconstruction of these firms' financial and tax records, and policy changes. Because of the PSU Public Sector Index's strong liquidity and attractive valuations following the COVID-19 pandemic, PSU stocks have seen a phenomenal run, pushing the index to all-time highs almost every month.

Reasons Behind Post-Covid Rally In PSU Index

Gaurav Goel (Entrepreneur, SEBI Registered Investment Advisor) said, "The flavour of equity markets in last few years have been PSU stocks. NIFTY PSU index has risen by 110% in the last year and 212% in the last 3 years. These are remarkable returns for a set of companies which were earlier ignored by investors for a long time. They were considered inefficient, corrupt, and debt-ridden with poor management capabilities. However, a lot has transpired in the last few years. GOI's determined effort to make public sector enterprises more efficient and competitive has helped investors in these companies including GOI (the largest investor) reap extraordinary returns. There is a good probability of the current establishment returning to power post-general elections this year. It is expected that momentum in public sector enterprises will enhance substantially given GOI's commitment to 'Atmanirbhar Bharat' or 'self-reliant India'."

Dr. Ravi Singh, SVP - Retail Research at Religare Broking Ltd said, we have seen a phenomenal surge in PSU stocks like banks, defense, OMC's, power. There are several reasons behind this rally:

Benefits from government policies- Favorable government policies and initiatives aimed at boosting the performance of PSU companies have contributed to their growth. Make in India initiative by the government was a game-changing move for the Defence counters like HAL, BDL, Cochin Shipyard Ltd, Mazagon Dock Ltd.

Improvement in books - Financial reconstruction in their books of accounts has led to a change in the fundamentals of the PSU counters. Due to this many big broking houses have given buy ratings to PSU companies.

Investor sentiment- Positive investor sentiment, high dividend yield and stability have gained a lot of retail participation has helped in a further leg of up move.

PSU Index Outlook

Mr. Prasanna Pathak, Director and Board Member of Asit C Mehta Financial Services Ltd said, "The PSU index, on a broader level, has languished for the last 10-15 years. Investors did not have confidence in the stability of regulation, capital allocation, government intervention, and lack of professionalism. Hence, though earnings were happening, due to the above issues, investors were not investing in these stocks, and hence, they were available at very attractive valuations. In the last 3-4 years, the government addressed some of the above issues of investors. Also, earnings growth improved significantly due to government spending and focus on these PSUs. Investors waited for a few quarters to analyze the change to be confident about the trend. Post this, there was a significant re-rating of these stocks, which were available at a fraction of the valuations of the private peers. The rise is due to the re-rating of the entire sector. The defense theme stood out in the last 3-4 years, especially in line with increased spending in defense and geopolitical situations. Most of the re-rating on the PSU index side has been done now. Elections might be a non-event, as continuity is expected. Going ahead, these stocks are expected to deliver returns in line with the earnings growth."

"A stellar run in PSU stocks post COVID due to attractive valuations and high liquidity in terms of funds inflow has led to the PSU Public sector index to dizzying heights with all time highs made almost every month now. However, technically, the charts look extremely overbought with strong resistance at 19365. A Daily close below support of 18483 could lead to a target of 17000 in the near term & 15920 in the longer term. Investors are advised to keep booking profits at current levels," said AR Ramachandran from Tips2trades.

Stocks To Bet

Dr. Ravi Singh said, "In banking, I will bet on (SBI, Bank of Baroda), energy (ONGC, NTPC), infrastructure (NBCC, Engineers India Limited) and in Defence (HAL, BDL) as these companies have strong fundamentals, consistent earnings, and growth potential. The market believes that the Modi government will retain its power, its continuation of policies and focus on capex expansion we can see a further rally in PSU counters. But one should wait for the upcoming volatility to fizzle out for fresh investments."

Gaurav Goel said, "Despite a massive rally, we remain extremely bullish on PSU stocks. While it seems that they have already run up a lot, we believe that scale of opportunity is huge. We remain constructive on Defence (HAL, BEL, Mazgaon Dock), Railways (RITES, RAILTEL, BEML), PSU Banks (SBI, Canara Bank, Bank of Baroda), Commodities (Coal India, ONGC, NMDC), Power (NTPC, Power Grid) and NBFC's (PFC, REC). A word of caution though. Not all PSU stocks are worth buying. Some of them need more time and effort to recover. Hence don't be blindfolded in your selection."

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.