PSU Stocks: Riding the Reform Wave

PSU stocks, once seen as underperformers, have rebounded with strong performance fueled by reforms. Abhishek Wani analyzes their growth potential, volatility, and the risks involved[EasyDNNnews:PaidContentStart]

The Public Sector Undertaking (PSU) sector has long been a cornerstone of India’s economic architecture. Conceived as instruments of nationbuilding in the decades after independence, PSUs continue to dominate strategic industries such as Banking, energy, Defence, and infrastructure. Their role is not merely financial but deeply strategic—securing India’s fuel supplies, financing its growth, and providing the industrial backbone for defence and development. 

For much of the past two decades, however, PSUs carried the reputation of lumbering giants—slow, bureaucratic, and unattractive to investors. State control and inefficiencies often led to chronic underperformance compared to more agile private peers. Yet, the tide has shifted. Since 2020, a confluence of reforms, balance-sheet clean-ups, fiscal impetus, and global tailwinds has reignited investor interest. From disinvestment and consolidation to structural reforms in credit and energy, PSU stocks have ridden a reform wave that has transformed sentiment and delivered outsized returns. 

This special report takes a statistical and market-based view of this transformation. It examines long-term and rolling returns, volatility, skewness, kurtosis, and valuations, while linking the numbers back to policy drivers. The story that emerges is nuanced: PSUs today are no longer mere laggards dependent on state bailouts, but tactical instruments for investors to capture bursts of outperformance—though not without risk. 

Assumptions and Research Period For this analysis, we use the following framework: 

■ Indices considered: Nifty 50 (broad benchmark), Nifty PSE (public sector enterprises), and Nifty PSU Bank (state-owned banks). 

■ Research periods:
▸10-Year CAGR: October 2015 – September 2025.
▸ Rolling 3-Year Returns: October 2018 – September 2025.
▸ Valuation Snapshot: September 2025 compared with 10-year averages. 

■ Returns considered: Price-only indices (no dividends). 

■ Statistical treatment:
▸ Rolling CAGR = Index(t)/Index(t–36) − 1.
▸ Volatility = standard deviation of rolling returns.
▸ Skewness/Kurtosis = relative to normal distribution.
▸ Valuation zones = approximated with z-scores vs. historical mean. 

Skewness measures the asymmetry of returns, with positive skew indicating a higher chance of rallies and negative skew signalling more frequent declines. Kurtosis gauges the likelihood of extreme outcomes, with high kurtosis showing larger price swings. The Z-score assesses how current valuations compare to historical averages, indicating whether an asset is overvalued or undervalued. 

Performance Overview: PSU Stocks vs. Broader Market 
Ten-Year Price CAGR (Oct. 2015 - Sept. 2025) 

Over the past decade, PSU indices have kept pace with the broader market, even slightly outperforming in the case of the Nifty PSE. Between October 2015 and September 2025, the Nifty 50 compounded at 12.65 per cent, while the Nifty PSE clocked 12.82 per cent and the Nifty PSU Bank index 11.26 per cent. Contrary to the narrative of PSUs as perpetual underperformers, this data reveals that long-term investors have not been short-changed by sticking with the sector. 

Rolling Returns and Volatility 
Rolling 3-Year Returns (Oct. 2018 - Sept. 2025) 

Rolling 3-Year Returns Statistics

The contrast between the benchmark and PSU indices is striking. While the Nifty 50 offered a steady mean return of 15.4 per cent with minimal volatility, PSUs were a rollercoaster ride. The Nifty PSE Index delivered a mean rolling return of 28.7 per cent and PSU Banks soared at 32.2 per cent, but both came with extraordinary volatility, four to five times that of the Nifty 50. 

The skewness figures highlight another aspect: PSU indices are positively skewed, meaning that they produce outsized rallies during reform-driven phases. At the same time, their platykurtic distributions (negative kurtosis) imply more dispersed outcomes and wider swings than the benchmark. 

Risk Character: Skewness and Kurtosis 

The shape of return distributions tells us much about the inherent risk profile. Both the Nifty PSE and Nifty PSU Bank indices exhibit positive skewness—0.38 and 0.62, respectively. This suggests that investors periodically experience bursts of sharp upside, often coinciding with reforms, recapitalisation, or strategic announcements such as defence procurement orders or disinvestment programmes. 

However, their kurtosis is negative, −1.02 for PSEs and −0.76 for PSU Banks, pointing to flatter distributions than a normal bell curve. This means returns are more dispersed and less clustered around the mean, creating unpredictable cycles where timing of entry and exit becomes critical. 

In contrast, the Nifty 50 remains close to a normal distribution, with near-neutral skewness and low excess kurtosis. It plays the role of a steady compounding anchor, delivering predictability and stability. 

Statistical Examination of Rolling Returns 

Over the 2018–2025 window, PSU stocks clearly stood apart from the benchmark. The Nifty 50 delivered consistent but modest returns with low volatility, reflecting its role as a steady compounder. In contrast, the Nifty PSE and PSU Bank indices produced significantly higher rolling returns, but at the cost of far greater volatility—four to five times higher than the Nifty 50. This risk–reward trade-off is reinforced by the distributional metrics. Positive skewness highlights how PSU indices can unleash powerful upside bursts during reform-led phases, while their negative kurtosis points to more dispersed outcomes and frequent swings, making returns less predictable than the benchmark. The probability lens adds another dimension. The Nifty 50’s current return sits close to its historical median, around the 48th percentile, signalling balanced valuations. In contrast, PSEs are at the 85th percentile and PSU Banks at the 77th percentile—zones that are statistically rare and thus more exposed to the forces of mean reversion. The excess kurtosis figures reinforce this asymmetry, showing that while the benchmark retains near-normal stability, PSU distributions tilt toward extreme outcomes. 

Drivers of PSU Stock Performance
The rally in PSUs since 2020 cannot be understood in isolation. Four major drivers underpin this revival: 

▪️Government Reforms and Disinvestment— Privatisation announcements, such as those for IDBI Bank and BPCL, and the sale of Air India, have brought fresh investor attention. Strategic stake sales signal not only capital inflows but also improved governance and accountability. 

▪️Banking Sector Consolidation and Recovery— Years of stressed assets had eroded confidence in PSU banks. Through a combination of consolidation, recapitalisation, and aggressive provisioning, the sector has emerged stronger. As of FY2025, credit growth stands at ~16 per cent YoY, while asset quality has materially improved. Many PSU banks still trade at significant valuation discounts to private peers, creating tactical opportunities 

▪️Energy Sector Strength — Oil and gas PSUs such as ONGC, IOC, and BPCL have benefitted from strong refining margins, higher throughput, and government incentives for renewables and green hydrogen. They continue to play a pivotal role in India’s energy transition while generating robust earnings growth. 

▪️Defence and Infrastructure Push — The self-Reliance drive in defence and record government capital expenditure have been game-changers for PSUs in these segments. Hindustan Aeronautics and Bharat Electronics exemplify how sustained Order Books and government support can transform PSU earnings trajectories. 

Valuation Picture

The valuation lens offers a different perspective. While performance highlights volatility, valuations reveal where each segment sits within its historical context. 

The Nifty 50, at 21.86x earnings, trades below its 10-year average of 24.76x. With a z-score of −0.69, it sits in the 31st percentile, implying fair to attractive valuations and some cushion if earnings hold up. 

PSU Banks look less forgiving. At 1.20x book value, they are 0.85 standard deviations above their mean—around the 80th percentile of history. This reflects optimism already priced in. While further rallies remain possible, the risk of pullbacks is higher if delivery slips. 

The Nifty PSE Index occupies a middle ground. At 11.91x earnings, it stands modestly above its 10-year mean of 10.40x (z-score +0.64, roughly the 74th percentile). The premium reflects rerating since 2023, driven by reforms and the government’s capex push. Reasonably valued but not cheap, the segment could face reversion if policy momentum cools. 

Valuation Position on the Normal Distribution Curve 

Statistical Takeaway
▪️Nifty 50: Below mean - fair entry point, valuation cushion intact.
▪️PSU Banks: Above mean - optimism-driven, vulnerable to corrections.
▪️PSEs: Slightly above mean - justified premium, but not deeply undervalued. 

From a valuation standpoint, the Nifty 50 looks the safest bet. PSU Banks and PSEs, by contrast, are in the upper quartiles of their distributions—attractive only if reform momentum and credit growth continue. For investors, PSU exposure should be tactical: rewarding in the right cycle but risky if expectations reset. 

Risk Factors
The PSU story, though compelling, is not without risks. Global oil price volatility or geopolitical shocks can erode earnings in energy PSUs. Policy uncertainty—particularly around disinvestment timelines—adds unpredictability. For PSU Banks, any deterioration in credit quality could trigger swift corrections, given their high-beta nature. 

Outlook
The medium-term case for PSUs remains intact. Reform momentum, healthier balance sheets, and sectoral tailwinds continue to support the story. Yet, the elevated valuations of PSU Banks and PSEs mean investors must tread cautiously 

The Nifty 50 remains the compounding anchor, trading below its historical mean and offering valuation comfort. PSEs still hold moderate upside potential, provided reforms stay on track. PSU Banks are the high-risk, high-reward segment: capable of sharp rallies but equally prone to violent reversals. 

The prudent approach is selective exposure, staggered entries, and careful position sizing. Long-term investors should anchor portfolios with quality PSUs in banking, energy, and defence, while tactical investors can ride reform-led bursts with disciplined risk management. 

Conclusion
PSU stocks are once again among the most intriguing corners of the Indian equity market. Once dismissed as underperformers, they have staged a renaissance under the reform wave. Statistically, they demonstrate higher mean returns but at the cost of greater volatility and unpredictability. Positive skew ensures periodic bursts of extraordinary outperformance, while platykurtic distributions confirm the jagged, reform-driven nature of their journey. 

Valuations are no longer cheap, but remain attractive enough if policy support continues. The Nifty 50 provides stability, PSEs offer policy-linked growth, and PSU Banks deliver the highbeta play. The right strategy is balanced exposure: treating PSU equities not as steady compounders but as tactical opportunities requiring discipline. 

The reform tide has redefined the PSU landscape. For investors willing to ride its waves, the journey may be volatile but promises substantial potential. Far from relics of the past, PSUs are emerging as integral vehicles in India’s next phase of wealth creation. 

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