PSU value stocks: Buy these 4 shares; govt firms stare at earnings recovery, likely re-rating

Listed PSU firms have been gaining momentum for the past few weeks now as analysts expect government-run companies to make a comeback in the forthcoming quarter, after years of underperformance. Brokerage and research firm JM Financial, in a recent report, said that their analysis has highlighted a disconnect between PSU valuations and operational performance both vis-à-vis historical averages and the broader market. “The BSE PSU Index valuation is at 9x P/E and 0.9x P/B; this is 25-30% lower than last-5-year averages and the valuation discount to the BSE 500 Index has further expanded to ~70% vs. 40-50% in FY16,” the report said. JM Financials has picked stocks from the PSU universe that it believes could be value plays going forward.

Disconnect between PSU valuation and operation performance

The report said that in the last three years the BSE PSU Index is down 40%while BSE 500 has gained 20% in the same period. The PSU index has expanded its discount to the BSE 500 index while the net profit of state-owned firms as a percentage of the BSE 500 index has remained stable at 25%.

The report said that the key reasons for PSU underperformance over the last few years has been, frequent stake sales by the government, ESG concerns, and a major hit to earnings for Oil & Gas PSUs after the onset of Covid-19. However, JM Financial added that it sees concerns abating. “We also expect a reversal of PSU de-ratings seen in the last few years due to the government’s plan to avoid frequent stake sales and instead focus on strategic disinvestment and align management incentives to boost profitability and valuations,” they added.

ONGC

The stock currently trades at Rs 93 per share while JM Financial has a target price of Rs 120 on the stock, implying a 30% upside. “We had recently upgraded ONGC as tactical BUYs on rising crude price due to positive Covid-19 vaccine developments,” the report said. They added that ONGC could also benefit from m potential deregulation of/hike in domestic gas price given that a government-formed committee is looking into it. Year to date, shares of ONGC are down 26% so far. However, since the beginning of November, ONGC has zoomed 43%.

Oil India

JM Financial has picked Oil India for the same reasons as ONGC. Shares of the firm are currently trading at Rs 111 per share, the target price for the scrip is Rs 130, implying an 18% upside potential. The target price for Oil India assumes Brent crude price at $55/bbl for FY22-23. Since the beginning of November, the stock has zoomed 32%, however, despite this rally it trades at attractive valuations of 4.8x FY22 P/E.

Coal India

Among PSU Power stocks, Coal India has been picked by analysts at JM Financial who see a 48% upside potential for the stock to reach the target price of Rs 200 per share. Coal India has been languishing owing to the ESG concerns pinned on it. Between the financial year 2016 and the current fiscal year, Coal India’s market capitalization has plummeted 66% while Profit After Tax (PAT) CAGR has been 3% and dividend yield has been at 9%.

NTPC

NTPC was also hit by ESG concerns over the years. Its market capitalization has fallen 23% between the financial year 2016 and the current fiscal year PAT grew at CAGR 8% with a 3% dividend yield. Repeated government stake sales have also been a rider for the stock. “For NTPC, with Government stake falling to 51%, we see diminishing risk of a fresh stake sale. ESG concerns for NTPC are alleviating as it transitions to a higher mix (25%) of green energy by setting up 32GW of renewables energy (RE) by 2030,” the report noted. Currently, the stock trades at Rs 100 per share, the target price of Rs 145 apiece, implies an upside of 43%.