PSU Stocks: Time for Selection

The Closing-Bell Paradox
At the close on September 22, the BSE PSU index stood at 20,068.31. On the surface, that looks reassuring. A year earlier, on September 29, 2025, it stood at 19,637.68, leaving the index with a modest gain despite a volatile year. The broader BSE 500, meanwhile, was almost flat over the same period. But the index masks a much more fractured market. The PSU trade has not moved as one block. It has split into clear winners, sharp laggards and everything in between.[EasyDNNnews:PaidContentStart]

BHEL gained 77.2 per cent over the year, while ChennaiPetroleum rose 84.7 per cent and National Aluminium advanced 74.0 per cent. Bank of Maharashtra gained 47.1 per cent. At the other end, Rail Vikas Nigam fell 40.8 per cent, IRCON declined 38.6 per cent, Indian Railway Finance Corporation lost 36.4 per cent, IRCTC dropped 35.8 per cent, SJVN declined 31.8 per cent and RailTel fell 29.7 per cent.

The divergence is striking because many of these companies operate under the same broad government investment priorities. The market, however, is increasingly differentiating between their earnings, valuations and execution prospects.That is the first major clue to the next phase of the PSU story. The earlier rally was driven largely by a change in perception. Investors became more willing to value state-owned companies on their operating businesses rather than automatically applying a discount because the government was the controlling shareholder. The next phase is different. Investors now have to decide which companies have earned a higher valuation through stronger economics and which have simply benefited from the same broad rerating.

Figure 1. The PSU index still leads over a year, but the lead has largely evaporated. Both indices are rebased to 100 on September 29, 2025. The PSU relative advantage surged early in 2026, peaked in March and subsequently contracted. From April 1 to September 22, the BSE 500 rose 8.7 per cent while BSE PSU declined 0.6 per cent. Source: DSIJ calculations from daily closing levels.

The breadth data make that distinction harder to ignore. Only 21 of the 60 companies in the BSE PSU index in the snapshot delivered positive one-year returns, while 39 declined. The median return was –6.4 per cent, even as the capitalisationweighted PSU index remained in positive territory. The concentration of the index also matters. The ten largest companies represent roughly 56 per cent of the aggregate market capitalisation in the 60-stock sample. Index resilience can therefore coexist with widespread weakness among individual stocks.

56 per cent of the sample’s market capitalisation sits in its ten largest companies.

The central debate is no longer whether India has entered a multi-year investment cycle spanning infrastructure, Defence, banking and energy. The data and policy measures point in that direction. The more difficult question is how much of that future is already reflected in individual share prices. And that answer changes sharply from one sector to another.

How The State Became Investable
For much of the post-liberalisation period, investors applied a persistent ‘PSU discount’. The reasoning was understandable. A state-owned company serves two sets of interests, minority shareholders seeking returns on capital and a government pursuing fiscal, strategic, employment, energy-security or social-policy objectives. Those priorities can align, but they do not have to.

What changed was not state ownership itself, but the economic environment in which state-owned companies operate. The government’s Public Sector Enterprise policy, formally adopted in February 2021, created a framework under which parent PSE boards could recommend divestments, minority stake sales and closures of subsidiaries and joint ventures. Implementation has been uneven, but the direction matters. Public assets can increasingly be consolidated, monetised or sold rather than simply retained within the state-owned system.

The larger shift has been in public investment. According to the Economic Survey, central capital expenditure rose from an average of 1.7 per cent of GDP before the pandemic to roughly 2.9–3 per cent afterwards, with effective capital expenditure reaching about 4 per cent of GDP in FY2025. The Survey describes this as a rebalancing of government spending towards asset-creating outlays.

1.7 per cent → ~3 per cent
Central capex as a share of GDP, before the pandemic versus after it.

The 2026–27 Budget continues that investment push. Public capex rose from ₹2 lakh crore in FY2014–15 to ₹11.2 lakh crore in the 2025–26 budget estimate, and the proposed allocation for 2026–27 is ₹12.2 lakh crore. The Budget also proposes dedicated real-estate investment trusts for significant CPSE property assets and restructuring of Power Finance Corporation and REC with the stated aim of improving scale and efficiency

The operating profile of central public enterprises has also changed materially. Economic Survey data show that between FY2017–18 and FY2024–25, the net worth of operating CPSEs increased from about ₹11.0 lakh crore to ₹21.9 lakh crore.

Capital employed nearly doubled to ₹46.3 lakh crore, aggregate net profit rose from ₹1.24 lakh crore to ₹2.91 lakh crore, and Dividends increased from ₹76,014 crore to ₹1.39 lakh crore. Losses at loss-making enterprises declined from ₹32,180 crore to ₹18,055 crore.

Exhibit B. The CPSE balance sheet has roughly doubled in seven years. Operating CPSEs, Rs lakh crore. Aggregate net profit nonetheless fell about 9.7 per cent in FY2024–25 from FY2023–24. Source: Economic Survey statistical appendix, Table 2.9.

There is, however, an important qualification in the same data. Aggregate CPSE net profit fell about 9.7 per cent in FY2024–25 from FY2023–24 even as turnover increased. The improvement in the public-enterprise balance sheet is meaningful, but it has not made these businesses immune to cycles, commodity prices or changes in operating conditions.

That is the key valuation point. Structural improvement can strengthen the investment case without making earnings predictable.

The transformation is real. It is not linear.

The Easy Rerating Is Over
The first step is to stop treating all the PSUs as one theme. They span banks, insurance, hydrocarbons, mining, coal, electricity, defence, heavy engineering, railways, shipbuilding and specialised finance. Their business models, capital needs and earnings drivers are very different. The common factor is a large government shareholder, not a common economic model.

The table makes one point immediately clear. The correction has not created a uniform bargain. In some groups, it has brought valuations closer to fundamentals. In others, it has only taken some heat out of unusually high multiples.

Public-sector banks present the clearest combination of valuation and operating metrics in the sample. The 12 banks trade at a median 0.94 times book value, with median ROE of 15.1 per cent and median one-year performance of +9.2 per cent. SBI trades at roughly 1.48 times book and 10.9 times earnings, with reported ROE of 15.4 per cent. Union Bank, PNB, Canara Bank and Bank of Baroda trade around or below book value.

The valuation case would be less compelling if asset quality were deteriorating. The RBI’s June 2026 Financial Stability Report put the banking system’s gross NPA ratio at 1.8 per cent in March 2026, while its baseline projection keeps the ratio below 2 per cent through March 2028. Credit growth reached 14.5 per cent in FY2026, with state-owned lenders continuing to outpace private peers. The RBI said profitability had benefited from sustained credit expansion, stable interest margins and operating-income growth.

The risks, however, remain part of the valuation equation. Under the RBI’s severe stress scenarios, gross NPAs could rise to 3.8–4.1 per cent by March 2028. The central bank also highlighted rising household debt and rapid growth in loans against gold. A low price-to-book multiple is useful only if current ROEs and credit costs remain reasonably durable.

3.8–4.1 per cent
Gross NPAs in the RBI’s severe stress case for March 2028, against 1.8 per cent today

For investors assessing public-sector banks, the framework is therefore a familiar banking one rather than a purely thematic one. The valuation needs to compensate for the risks, while sustainable ROE needs to remain comfortably above the cost of equity.

Defence sits at the other end of the spectrum. The operating opportunity is strong, but the market has already placed a substantial premium on many of the leading names.

India’s defence manufacturing story has considerable policy support. Official figures show domestic defence production reached a record ₹1.78 lakh crore in FY2025–26, up 15.6 per cent from the previous year and more than double FY2020–21. Defence exports reached ₹38,424 crore, while public-sector and other state enterprises still accounted for about 76 per cent of defence output.

But a growing market does not mean a permanent PSU monopoly. The private sector’s share of defence production rose to 24 per cent, its highest level yet. Policy is expanding the addressable market, while competition for that market is also increasing.

The valuation gap is significant. Hindustan Aeronautics trades around 34.8 times earnings and 7.9 times book, while Bharat Electronics trades at 47.2 times earnings and 12.1 times book. The defence-and-industrials cluster has a median P/E of 53.8 times. BEL’s 27.5 per cent ROE and HAL’s 24.0 per cent ROE support premium valuations to an extent, but the starting price still leaves less room for weaker-than-expected execution or slower growth.

Superb structural economics can become a dangerous investment when priced as certainty.

Figure 2. The PSU universe is split between cheap cash generators and richly rated strategic assets. Bubble size represents market capitalisation. Dashed lines show the sample median of roughly 1.78 times book and 15 per cent ROE. Defence and selected industrial names occupy a very different valuation regime from banks, energy firms and public financiers. Source: DSIJ calculations.

That changes the defence debate. The question is no longer whether India will spend more on defence. The more relevant question is how much of that future growth investors are already paying for today.

Power and public finance occupy a different position. The cluster has a median ROE of 14.0 per cent, yet its median one-year return is –13.8 per cent. PFC trades at around 4.4 times earnings and 0.8 times book with a 20.7 per cent ROE, while REC shows similarly strong reported profitability. These metrics stand apart from the much richer valuations seen across several rail and strategic industrial names.

India’s power system is entering a large investment phase, regardless of the eventual mix of coal, renewables, nuclear, storage and grids. The Central Electricity Authority data cited in the analysis show the renewable segment’s installed capacity rising from 147.35 GW in April 2021 to 271.96 GW by January 2026, while renewables supplied around 27 per cent of electricity generation in FY2025–26 through January. Solar capacity alone had reached roughly 140 GW.

For PSUs, that transition creates two broad opportunities, financing the investment and owning the networks that connect it. It also brings risks around leverage, stranded assets and technology changes. The Budget’s proposal to restructure PFC and REC could therefore matter, but restructuring by itself does not guarantee value creation. The outcome will depend on ownership, capital requirements, funding costs and how minority shareholders are treated.

Energy and resources look cheaper partly because their risks are easier to identify. ONGC trades at roughly 6.8 times earnings and 0.8 times book with a 5.6 per cent dividend yield, while Coal India trades at about 8.4 times earnings with a yield above 6 per cent. IOC and BPCL also offer comparatively high cash yields. Their valuation cases require less aggressive growth assumptions than those of many defence or railway contractors.

That does not make them automatically mispriced. Commodity prices can overwhelm operational improvements, transition spending can absorb cash, and state-owned energy companies also operate within national energy-security priorities. High dividend yields should therefore be viewed alongside the cyclicality and policy risks attached to the businesses.

The government’s new monetisation programme could still improve capital efficiency across several PSU sectors. National Monetisation Pipeline 2.0 identifies ₹16.72 lakh crore of potential transactions during FY2026–30, including ₹5.8 lakh crore of private investment. The indicative allocation spans major infrastructure assets, including power, railways and coal.

For shareholders, the quality of asset monetisation matters more than the headline number. In the favourable outcome, mature assets are monetised at attractive valuations and the proceeds are recycled into higher-return projects or distributed efficiently. In the less favourable outcome, assets are sold to meet funding needs and replaced with lower-return capital expenditure. The transaction value alone cannot tell investors which outcome is taking shape.

₹16.72 lakh crore
NMP 2.0 pipeline, FY2026–30. Whether it creates value depends on where the proceeds go.

Railways provide perhaps the clearest reminder that a falling share price is not the same thing as a cheap share.

Rail Vikas Nigam is down 40.8 per cent over one year, IRCON 38.6 per cent, IRFC 36.4 per cent, IRCTC 35.8 per cent and RailTel 29.7 per cent. After declines of this magnitude, it is easy to assume that valuations have become attractive. Yet the rail, infrastructure and services cluster still trades at median multiples of 25.2 times earnings and 4.16 times book, despite a median one-year return of –27.7 per cent.

A 40 per cent fall after an extreme rerating can leave a stock dearer than before the enthusiasm began.

The demand story, meanwhile, remains intact. Railways account for ₹2.62 lakh crore of the NMP 2.0 monetisation pipeline, while the Economic Survey shows that railways received ₹2.52 lakh crore of central capital expenditure in FY2024–25.

The issue is not the absence of growth. It is the price paid for that growth. A 40 per cent correction following an extreme rerating can still leave a company expensive relative to its earnings power. The arithmetic is simple, but it is often overlooked when investors anchor on the size of the decline.

This explains why the PSU index can remain relatively resilient while many individual stocks experience deep corrections. Large companies, banks and selected resource names have provided ballast, while some of the more speculative parts of the trade have already gone through a substantial internal bear market.

The causal chain for the next phase is therefore straightforward.The framework offers a more useful test than the PSU label itself. A state-owned company needs to clear three hurdles at the same time. The policy tailwind should translate into incremental cash flow rather than merely higher capex, management should earn returns above the cost of capital through the cycle, and the valuation should leave some room for execution errors or policy objectives that may not maximise minority-shareholder value.

Few companies will clear all three hurdles in every cycle. That is precisely why the next phase of the PSU story is likely to be driven more by selection than by broad thematic exposure.

Three hurdles: policy turns into cash flow, returns beat the cost of capital, and the price leaves room for error.

The Scenarios From Here
The PSU story has implications beyond individual stocks. India is using the public balance sheet as a bridge. Government capex creates infrastructure, PSU lenders and enterprises finance or execute it, asset monetisation recycles mature assets, and private capital is expected to follow. The ₹12.2 lakh crore publiccapex proposal for 2026–27 and NMP 2.0 are two parts of that broader framework.

The attraction is clear. Public investment can accelerate power networks, transport infrastructure and strategic manufacturing without requiring private companies to absorb every early-stage risk. The risk is that capital availability can outrun project returns, leaving public enterprises with heavier investment requirements but insufficient incremental returns.

Defence adds another layer. DPSUs can gain scale as nationalsecurity priorities and exports expand, but private-sector participation is increasing at the same time. A larger defence market may therefore create more opportunity for incumbents while also creating more competition.

The energy transition presents a similar trade-off. Grid operators, power financiers and generators can benefit from rising electricity investment, even as parts of their existing asset base face technological and environmental change. The CEA’s capacity trajectory illustrates the scale of that transition.

The RBI’s stress tests explain why the downside case cannot be ignored. Its baseline banking outlook remains benign, but a severe macroeconomic shock could push bad-loan ratios towards 4 per cent. On the other side, the government’s ability to sustain public investment while managing its finances is central to the constructive case.

The most plausible path sits between the extremes. The PSU revival cannot be dismissed as a short-lived trading phenomenon. Balance sheets, government investment, defence localisation, banking asset quality and asset recycling have all changed. However, those improvements do not justify every valuation. The market is likely to reward companies that turn the structural opportunity into earnings and cash flow, rather than simply those operating in favoured sectors.

The next phase of the PSU story is therefore likely to depend less on another broad multiple expansion and more on actual earnings delivery.

The bears are wrong that this was mere speculation, and the bulls are wrong that any valuation will do.

The Judgement
So, is this the right time to enter the PSU theme? Not as a single trade. Increasingly, the opportunity lies in identifying individual companies where valuation, returns and structural drivers line up.

The evidence does not point to one common ‘PSU index bottom’. The correction is already deep in railways and parts of public finance, less visible in some banks and resource companies, and absent in a few industrial names that have continued to rise. There is no single valuation level from which every PSU stock should be expected to recover.

The most compelling combination is where valuation is modest, ROE is already reasonable and the structural tailwind supports the business rather than carrying the entire investment case. Public-sector banks fit that description more closely than several of the highly valued strategic manufacturers.

Some energy and resource companies also offer this combination, provided investors are comfortable with commodity and policy risk. Power financiers could become more relevant if restructuring improves rather than dilutes capital efficiency

Defence still offers a strong long-term structural opportunity, but its premium valuations make discipline particularly important. Rail-related stocks present the reverse situation. Their large drawdowns have improved the prospective return profile, but several still do not screen as conventionally cheap on the supplied data.

The old PSU trade asked investors to accept that state-owned companies deserved a smaller discount than they once received. That argument has largely played out. The next trade is more demanding. Investors have to distinguish between state-owned companies that can justify a premium, those that deserve to trade broadly in line with peers, and those whose low valuations may reflect risks that the market has not overlooked.

Research Methodology

To come up with a ranked list of PSU stocks, we took into consideration five crucial parameters. The first includes market capitalisation. The remaining parameters are obtained from the Profit & Loss Account and include Sales, Operating Profit and Net Profit. We also considered the PAT margin for ranking the stocks as it indicates how efficient a company has been in converting the given sales into profits. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance.

We then segregated the companies into three categories as follows: n Turnaround Performance: These companies include those that successfully managed to turn around the losses incurred in FY25 into profits in FY26. n Improving Financials: Although these companies still reported losses in FY26 as they did in FY25, they succeeded in reducing these losses by a notable amount. This indicates that they are on the road to recovery. n Thriving Companies: This list includes all the remaining profitable PSU companies in FY26. A consolidated ranking was done in each category to arrive at the list. All the raw financial data is sourced from Accord Fintech and price-related information is as of September 23, 2026.

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