PSU Stocks Enjoy Their Moment Of Glory

Preface

From Shadows to Spotlight: The Resurgence of Public Sector Undertakings 

The resurgence of Public Sector Undertakings (PSUs) stocks in the Indian equity market in the last few years has been nothing short of remarkable. These companies, once overshadowed by private sector counterparts, have staged a remarkable comeback, attracting the attention of investors and analysts alike. The journey from underperformance to outperformance has been a testament to the resilience, adaptability, and strategic foresight of the PSUs. 

In recent years, PSUs across the sectors have witnessed a significant turnaround, driven by a confluence of factors. Government initiatives aimed at infrastructure development, defence indigenization, and promoting domestic manufacturing through initiatives like ‘Make in India’ have provided a strong foundation for PSU growth. These initiatives have not only boosted investor confidence but also propelled PSU stocks to new heights. 

The financial and stock market performance of PSUs has been exceptional. Companies like the Indian Railway Finance Corporation have seen unprecedented surges in their share prices, delivering substantial returns to investors. Similarly, PSU banks have demonstrated commendable financial performance, showcasing stability in asset quality and profitability. 

The resurgence of PSUs is reflected in the Nifty PSE index, which has consistently outperformed broader market indices in the last few years. This resurgence has sparked renewed interest and acceptance among mutual funds and brokerages, indicating a positive outlook for these stocks. 

Looking ahead, we anticipate continued strength in sectors such as railways, defence, and PSU banks. These sectors are poised for growth, supported by robust order books, government initiatives, and ongoing infrastructure development projects. However, investors are advised to exercise caution and selectivity, considering the dynamic market environment and potential policy changes. 

Dalal Street Investment Journal aims to provide comprehensive insights and strategic perspectives to navigate the evolving landscape of PSU investments. Through in-depth analysis, this special edition equips investors with the knowledge and foresight needed to make informed investment decisions in PSU stocks. 

Welcome to a deep dive into the resurgence of PSU stocks, their journey to prominence, and the strategic opportunities they present in the ever-changing investment landscape. 

Best Regards
The Editorial Team

After a phase of lacklustre performance under dark grey clouds, Indian public sector enterprises are now enjoying prime space in the sunshine, turning out to be smart bets in the Indian market. Primarily, this amazing turnaround has taken place due to the government’s focus on infrastructure development in order to propel the nation towards the status of an economic powerhouse and also the revolutionary decisions taken by the managements of the PSUs. The article details the PSUs to understand their current status 

The past few years have proven to be exceptionally favourable for public sector companies (PSUs). Since 2021, there has been a remarkable turnaround for battered PSU names. This is after Prime Minister Narendra Modi himself batted for the PSUs. The government’s emphasis on infrastructure capex, defence indigenisation and the ‘Make in India’ initiative in manufacturing has led to such a change in the landscape. This renewed focus has led to a re-rating of PSUs as a whole, driven by promising future prospects.
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The performance of PSU companies has been nothing short of impressive, both financially and in terms of stock prices. Notably, every PSU company has delivered positive returns during this period, with even the lowest return exceeding 15 per cent. For instance, the shares of Indian Railway Finance Corporation have surged by over 400 per cent in the past year alone, from approximately Rs 28 to Rs 193 before settling at Rs 144.1 presently. This translates to a remarkable growth of Rs 1 lakh investment becoming Rs 4.14 lakhs today. 

Similar success stories can be seen across various PSU companies, with Housing and Urban Development Corporation witnessing a staggering 3.41 times increase in its share price over the past year. Moreover, PSU banks have also witnessed substantial gains, with eight out of 12 governmentowned banks doubling investor wealth in the last year. PNB emerged as the top gainer, with its stock rallying by 176 per cent, followed closely by Indian Overseas Bank with over 172 per cent growth. Even State Bank of India (SBI), the largest lender in India, saw a respectable increase of 41 per cent in its stock price over the same period, outperforming many private counterparts. 

The robust performance of PSU companies is clearly reflected in the Nifty PSE index, which comprises companies where at least 51 per cent of outstanding share capital is held by the central government and / or state government, directly or indirectly, against the Nifty 500. Over the past 12 months, the Nifty PSE index has surged by a staggering 111 per cent, significantly outpacing the 39.4 per cent growth of the Nifty 500, demonstrating an outperformance of more than twice in just one year.

Nonetheless, it has not always been the case. When we analyse the historical performance, we observe that most of the times the PSUs have underperformed the broader market. The historical performance of the Nifty PSE index compared to the broader Nifty 500 index over the past decade has been characterised by a persistent underperformance, especially in the earlier years. From 2011 to 2020, the Nifty PSE index consistently lagged behind the Nifty 500. It was only in 2016 when the Nifty PSE index outperformed Nifty 500 by a margin of 14 per cent. This underperformance of the PSU basket could be attributed to various factors, including sluggish economic growth, policy uncertainties and the challenges faced by public sector undertakings post the global financial crisis. 

However, the scenario underwent a diametric change with the start of the decade and in the last four calendar years from 2021 to 2024 (till April), PSU companies have returned with a vengeance. During this period, the Nifty PSE index exhibited remarkable outperformance. In 2021, the index recorded an impressive 33 per cent growth, surpassing the Nifty 500 index return of 28 per cent. This trend continued into 2022, 2023 and 2024 till date with gains of 12 per cent, 77 per cent and 22 per cent, respectively, as compared to the more modest growth of the Nifty 500 during the same period. 
 

‘Nation First’ Policy

Government-owned companies have historically traded at discounts compared to their private counterparts. However, in recent years, they have significantly narrowed this gap because of their improving financials and better outlook. The net worth of all the central public sector enterprises (CPSEs) has shown notable improvement, rising from Rs 14.97 lakh crore as of March 31, 2022 to Rs 17.33 lakh crore as of March 31, 2023, marking a substantial increase of 15.75 per cent. This resurgence in the performance of PSU stocks has been attributed to the government’s ‘nation first’ intent. 

This impressive transformation can be credited to a combination of factors, including progressive government reforms, sustained economic growth, and enhanced management practices. Additionally, the PSU landscape is further bolstered by strong order books, indicating promising prospects for the near future. Companies such as Bharat Heavy Electricals Limited, National Thermal Power Corporation, Power Grid Corporation of India, NBCC and others serving the Indian Railways boast order books collectively amounting to several lakh crores, signifying a healthy pipeline of projects and better revenue visibility. 

Today, PSU companies are enjoying widespread acceptance among numerous mutual funds and brokerages, with many expressing a positive outlook even as these stocks trade at multiples of their earlier prices. This resurgence underscores the resilience and adaptability of PSU stocks, reflecting the evolving dynamics of the market. 

Going Ahead

In many sectors, government-owned companies are still trading at valuation lower than their private sector counterparts. The quest for relative value in a rapidly advancing market appears to be a significant driver behind the recent robust performance of PSU stocks. The current government has taken steps to enhance the operational autonomy of PSU companies and has proposed substantial reforms and divestments in these entities. Anticipation of the implementation of these measures upon the government’s return to power is another factor fuelling the outperformance of PSU companies. 

The bullish momentum in railways, defence and PSU banks seems poised to continue, with valuations still below euphoric levels. This sustained strength in these sectors can be attributed to factors such as robust order books, the impetus from initiatives like ‘Make in India’, and ongoing infrastructure development. Railway and defence stocks, in particular, are expected to maintain their positive trajectory, buoyed by these ongoing trends. Additionally, PSU banks are exhibiting commendable financial performance with stable asset quality. 

However, investors should exercise caution and selectivity within these sectors, as not all companies may benefit equally from the prevailing market dynamics. Looking ahead to 2024, the outcome of the general elections is expected to significantly influence the trajectory of these sectors. The continuation of existing government policies is likely to drive further outperformance in 2024. Conversely, any changes in government policies could lead to profit-taking in stocks within these sectors. Therefore, investors should closely monitor political developments and policy continuity as pivotal factors shaping the performance of defence, railways, and PSU banks in the upcoming year. 

Interview 

Shri Bhanu Prakash Srivastava
Chairman and Managing Director Bharat Electronics Limited 

BEL: Celebrating 70 Years of Excellence 

Bharat Electronics Limited started with humble beginnings and is now a global powerhouse that is constantly broadening its horizons while enhancing its efforts for more in-house developments. In this interview, Bhanu Prakash Srivastava, Chairman and Managing Director, BEL, talks about the extraordinary journey of the company and the strategies that it is presently implementing to expand its products and technologies within and outside the defence sector 

Bharat Electronics Limited (BEL) is celebrating 70 years in operation. On this historic occasion, can you share with us some thoughts on the organisation’s journey thus far and the road ahead? 

We are celebrating 70 years of excellence in operation and, indeed, it’s been quite a momentous journey. The astute vision of our founding fathers has come to fruition as BEL has established itself as a trusted technology partner of India’s defence forces. From a humble beginning in 1954, 70 years down the line, BEL is a global company that exports a wide range of high-technology products to numerous countries. As we commemorate this important milestone, BEL remains dedicated to exceeding expectations and continuously evolving to achieve new levels of success. Our commitment to innovation and growth ensures that we stay at the forefront of technological advancements and continue to make a positive impact on the world. 

Could you share details about your financial performance in FY 2023-24 and your order book position? 

It gives me immense pleasure to share that BEL has achieved a turnover of around ₹19,700 crore, provisional and unaudited, last financial year, against the previous year’s turnover of ₹17,333 crore, registering growth of 13.65 per cent. The company has declared two interim dividends amounting to ₹1,023.37 crore (140 per cent) for FY 2023-24. Overriding challenges posed by the prevalent geopolitical crisis, we achieved an exports sale of USD 92.98 million, as against the previous year’s export turnover of USD 48.33 million, registering a growth of 92 per cent. Some of the major products exported included transmit and receive modules, compact multi-purpose advanced stabilisation system, radar and electronic warfare systems, medical electronics, communication equipment, etc. 

Our export order book stands at USD 407 million, with export orders acquired during the fiscal year amounting to USD 211 million. BEL secured domestic orders worth around ₹35,000 crore, the highest ever in its history, in a single year. Among the notable defence orders obtained during the year were electronic fuses, EW systems, communication systems for naval warships, fire control systems, Akash prime weapon system, radars, sonars, software-defined radios, night vision devices, tactical communication systems and other projects and products in the non-defence sector. With this, the total order book of BEL as on April 1, 2024, amounted to around ₹76,000 crore. 

Seven of our strategic business units (SBUs) delivered a turnover of ₹1,000+ and quite a few reached almost close to it. Our Advanced Defence Systems Navy SBU needs special mention for creating a new benchmark by surpassing the ₹3,500 crore turnover mark in FY24. As each of our SBU or unit operates in high business potential areas, I look forward to many more SBUs or units joining the ₹1,000+ crore club. On this occasion, I would like to extend my sincere gratitude to all our stakeholders, especially our esteemed customers, inspection agencies, Ministry of Defence, DRDO, supply chain partners and all the shareholders for their wholehearted support and patronage. 

You have been diversifying into various business segments in the non-defence domain. Can you give us an update on your diversification drive? 

Related diversification has always been an important part of our business strategy and towards this multiple initiatives have been taken in this financial year. Some of the major ones include the formation of four new strategic business units (SBUs), namely, network and cyber security, unmanned systems, seeker and arms and ammunition. Apart from this, various new strategic tie-ups or MoUs have been established with select domestic players, global OEMs, academia, research and development organisations, start-ups, etc. 

Some of the major ones include collaborations with Elettronica Group for the joint development of new-generation EW systems, IAI (Israel) for short range air defence systems, Furono for navigational radars, Directorate General of Naval Armament for life extension, refurbishment and up-gradation of in-service armament of the Indian Navy, and Endure Air and Raphe mPhibir for unmanned systems. Also, in order to provide longterm product support services for MRSAM systems for the Indian defence forces, BEL is in the process of setting up of a joint venture company with IAI (Israel). 

Can you tell us about your initiatives in the area of research and development? 

BEL has been investing around 9 per cent of its turnover in research and development annually and is planning to increase the allocation progressively in the coming years. BEL has also launched collaborative research and development initiatives with Indian industries and the academia to augment its research and development and product design efforts. Our research teams have achieved yet another noteworthy accomplishment with the receipt of 150 granted patents this year, taking the total tally of patents granted to 197. We also filed 146 IPRs including 83 patent applications last year. 

‘Make in India’ and indigenisation are the industry buzzwords today. Can you tell us about some of your initiatives or achievements in this direction in FY24? 

BEL continued its thrust on indigenisation and ‘Make in India’ in a significant way throughout the year. Some of the major achievements include induction of lighter and compact version of weapon locating radar developed indigenously by BEL along with DRDO, and the inauguration of Indigenous Air Traffic Management System (ATMS), jointly developed by BEL and Airports Authority of India, at Bhubaneswar Airport. Additionally, BEL has included 117 significant LRUs or subsystems in positive indigenisation lists, creating opportunities for Indian vendors to participate in the indigenisation of these items. 

The ‘Make in India’ initiative and the new procurement category of Buy-IDDM will encourage Indian companies, including BEL, to carryout indigenous design and development of products with more focus. BEL is taking several steps to increase the level of indigenisation. These include strengthening the technology development process through short, medium and long term technology roadmaps, increased investments in research and development and setting up of a company-wide knowledge management system. The company is enhancing efforts for inhouse developments and strengthening close cooperation with DRDO laboratories, other national research laboratories and research and development organisations, including academia, start-ups and other such agencies for indigenous development. 

Can you update us about some of the recent accolades that have come your way for excellent work? 

The Hyderabad unit of BEL has bagged the prestigious CII EXIM Bank Award for Business Excellence 2023. Some of the other major awards received in the year include ‘Karnataka State Export Excellence Award’, Economic Times ‘Iconic Brand of the Year Award 2023’, ‘Employee Excellence Award’ from Times Group, Institution of Engineers (India) ‘Industry Excellence Gold Award for Business Excellence’, ‘Project of the Year – Large Category (Runner Up) Award’ from Project Management Institute, Indian Chamber of Commerce ‘PSE Excellence Award’, ‘Governance Now PSU Award’, ‘National Export Excellence Award 2024’, etc. 

What are your plans for the coming year and the future? 

The new financial year has arrived with its own set of challenges and new set of expectations from our stakeholders. I am certain that the competency, capability and motivation level of our workforce would be the key to deliver targeted business performance. BEL will continue to explore new growth opportunities through export initiatives, diversification, capability enhancement, competitiveness and modernisation. To retain leadership in our market share, huge collaborative efforts would be required among all business functions to enable us to achieve excellent business results. 

Interview 

Shri Arvind Kumar
Managing Director Chennai Petroleum Corporation Ltd. 

"Innovation And Capacity Building Are Central To CPCL’s Organizational Development & Long- Term Success" 

How is CPCL planning to navigate the potential shift toward renewable energy sources in the long term? 

The pace at which the world is embracing renewable energy is unprecedented. This underscores a paradigm shifts towards cleaner, more sustainable energy sources which is a testament to the collective efforts of Government, Industries and Individuals to combat climate change and transition towards a greener future. The future investments of CPCL will be balanced between conventional and renewable energy with a focus towards energy security, availability and affordability. 

Presently CPCL has around 20 MW capacity of renewable power including wind and solar energy. CPCL is further adding 10 MW of solar power by end of this year. We have also targeted to set up 10 KTPA green hydrogen facilities by 2030 and plans are underway to add sufficient renewable energy source in phased manner. 

What strategies are in place to meet the increasing demand for refined petroleum products in India, considering the projected growth of 2.2 per cent annually in primary energy demand? 

India is currently consuming roughly 5 million barrels per day (mb/d) of crude oil, and is expected to register an increase of 1.2 mb/d within a decade as per IEA reports. There are several other substantial projects on the horizon that could potentially elevate India’s refining capacity beyond the anticipated mark over a decade. These initiatives signal a proactive approach by Indian oil companies to anticipate future demand and ensure a steady supply of refined petroleum products. As India continues its rapid industrialization and urbanization, CPCL in joint venture with group company IOCL is planning to set up a 9.0 MMTPA Cauvery Basin Refinery & Petrochemicals Project (CBRPL) at Nagapattinam at an estimated cost of around ₹36,350 crores. These investments will play a crucial role in sustaining economic growth while also addressing energy security concerns thereby by meeting the increasing primary energy demand. 

How will CPCL ensure its operations remain competitive in a global market with fluctuating oil prices? 

CPCL sticks to the fundamental cues of analysing the price differential between Brent and Dubai crude (Low sulphur vs high sulphur) during crude procurement which reflects various factors such as differences in quality and regional market conditions which enables CPCL to select the right crude mix. CPCL’s strategy of maximizing the processing of opportunity crudes with meticulous planning demonstrates a proactive approach to adapt to changing feedstock qualities and market dynamics while maintaining operational efficiency and product quality. 

It also aims to optimize energy performance indicators including fuel & loss and capacity utilisation to improve profitability & cost competitiveness. By integrating strategies to enhance Physical performance into operational planning, CPCL has ensured sustained excellence while simultaneously reducing operational costs, improving overall performance infused by continuous innovation and technology with a focus on safety, reliability and environment norms. 

CPCL’s position as the 5th most complex PSU refinery in India with integrated lube and wax manufacturing facilities indicates that it has sophisticated processing capabilities and a diverse product slate compared to other refineries in the country. This complexity of CPCL’s refinery infrastructure coupled with the presence in a strategic location in the Manali Industrial belt at Chennai is playing a crucial role in the success of our business. Cluster effect where related industries and businesses are concentrated in the same area has fostered collaboration, improved supply chain synergies, maximized our gross refinery margins by leveraging the market advantages available in the region. CPCL serves the Manali Industrial Cluster by delivering a variety of petrochemical feedstocks to their specific requirements reliably and efficiently. Maintaining strong partnerships and competitiveness in specialty products markets like Hexane and Mineral Turpentine Oil (MTO), Jet propellant fuels (JP5, JP7) in defence sector demonstrates CPCL’s strategic focus on niche segments and value-added offerings. 

However, fluctuations in product cracks, geopolitical tensions, and changes in global oil flows keeps influencing the fundamental cues, leading to periods of convergence or divergence in their prices. 

Given the current geopolitical situation, how is CPCL navigating the global crude oil market to secure costeffective feedstock? 

The core undercurrents of the oil market succinctly depend on the Supply and demand dynamics which play a pivotal role in determining oil prices. In complex and dynamic oil market, where prices are constantly influenced by a multitude of variables, CPCL has diversified its crude basket with more than 150 crudes to ensure a reliable and cost-effective supply of feedstock while maximizing profitability. This involves market analytics and optimisation of crude procurement through LP modelling with diversified approach to crude oil procurement, utilizing term contracts and spot purchases. This strategy helps CPCL to mitigate risks associated with market volatility and ensure a cost-effective and reliable supply of crude oil to meet its refining needs. CPCL also conducts comprehensive analyses of future crude oil prices, supply-demand dynamics, diversification of supply sources, long term crude procuring contracts, natural hedging and inventory management, to effectively produce valuable petroleum products as CPCL navigates through the uncertainties of the market.
 

India’s Best Public Sector Undertakings 

PSU Ranking Methodology

Maharatna/ Navratna/Miniratna: The basic parameters to assess the winner companies are in terms of Balance Sheet size, net sales and profitability. These parameters are used to evaluate the companies in terms of size. To calculate the final rank, major weightage (30%) is given to Operating Profit and Net Sales each and then the remaining weightage (20%) is given towards Balance Sheet size and Net profit. The composite ranking provides the basis of deciding the winner. 

For selection of the most efficient companies, we evaluated the operational efficiency of the company. Hence, we have considered parameters like profitability per employee, cost of employee as against sales, working capital efficiency and leverage ratio. These parameters reflect the level of efficiency the companies are delivering. Equal weightage has been given to all the four parameters to arrive at the final ranking. 

For selection of the fastest growing companies, the emphasis is on the growth achieved during the last five years, as compared to the peers. For this, we consider the growth in sales, net profit and operating profit. To weave in the operational performance compared to the capital invested, we also evaluate return on net worth and return on capital employed. The compounded annual growth for last 5 years relatively depicts a true picture of the company in terms of its overall growth. All individual parameters are given appropriate equal weightage to calculate the final rank. 

Banks: Banks are ranked on comprehensive financial parameters. The financial performances are grouped in three major categories namely size, growth, and efficiency. Again, these major categories are subdivided and test various critical parameters to judge the performance of PSU banks for the fiscal year. 

While considering size we subdivided it into size of total assets of bank, total income, operating profit, and net profit. For growth we have considered CAGR in net interest income, and balance sheet size of last 2 years ending FY21. For most efficient category we have considered business per employee, profit per employee and Return on Asset (RoA) for FY21. All the individual parameters are given appropriate weightage to arrive at final ranking. 

Insurance: In insurance, we are keen to see that the growth in premium is balanced with the growth in claims. Also, we rank the companies to reassure that the best Balance Sheet is rewarded so that the liabilities are sufficiently provided by the reserves and balances.

Click here to download list of India’s Best Public Sector Undertakings

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