PSU rally likely to continue on re-rating hopes
Analysts believe privatisation initiatives could drive re-rating in the overall asset class.
The Nifty PSE index, which declined 11 per cent between January and August 2019 against the Nifty’s 1 per cent rise, has reversed the losing trend and climbed 9 per cent since September 1. ONGC, MOIL, Hindustan Aeronautics, Cochin Shipyard, NMDC, BEML, SAIL and BPCL are among the stocks gaining between 15 per cent and 40 per cent in the period, although they still trade below their five-year average price to book values.
With several stocks are trading at depressed valuations, analysts believe privatisation initiatives could drive re-rating in the overall asset class.
“The rally in PSU stocks would continue as they will get re-rated soon, with the government making it clear that it would not be interested in running these businesses,” said Sanjiv Bhasin, director at IIFL Securities. “Big risk capital would be invested in PSUs the moment there is a strategic divestment.”
Undervalued state-owned companies, such as Gujarat Mineral Dev Corp, ONGC, Oil India, MOIL, Hindustan Aeronautics, Gail India, Indian Oil, Engineers India, NTPC, Cochin Shipyard and NMDC could rally between 20 per cent and 40 per cent in the next one year, according to Bloomberg’s consensus estimates.
“Currently, there is a sense of optimism around PSUs over the divestment announcements,” said Pankaj Pandey, head of research, ICICI Securities.
“Many of the stocks that are reasonably valued could be re-rated once the government announces the details of divestment candidates.”
New Delhi has been on a divestment spree and is considering reduction in stake in a number of companies. Indian Oil is the third oil company in which it may reduce ownership from 51.5 per cent apart from BPCL, of which the Centre now owns 53 per cent.
“While we await the government’s announcement on the actual divestment candidates, among the non-strategic listed PSUs, quality companies with high and consistent ROCEs, high operating spreads, negative financial leverage, healthy and consistent operating margins and positive free cash flow yields will find favour with strategic investors,” said Pradeep Kumar Kesavan, senior VP-equity strategy, Elara Capital.