PSUs: Testing Times, Transformational Potential

In recent years, investors have shown strong optimism towards the PSU sector, with PSU stocks experiencing unprecedented growth driven by the government’s renewed focus. After individual stocks delivered substantial wealth creation opportunities, the tables have now turned. Currently, the BSE PSU Index, despite a partial recovery, remains 20 per cent below its 52-week high. Mandar Wagh sheds light on the reasons behind the earlier rally, the current weaknesses, and the long-term potential outlook 

When investors think of Indian public sector undertakings (PSUs), the first thing that often comes to mind is the remarkable rally these stocks have witnessed in recent years. The S&P BSE PSU Index—a key benchmark tracking the performance of public sector enterprises—has delivered an outstanding return of 320 per cent over the past five years. This exceptional performance stands out even after factoring in the recent months of significant correction and a relatively flat showing over the past year. 

Such a robust index-level gain hints at the extraordinary wealth creation potential many individual PSU stocks have offered to long-term, patient investors. For example, RVNL, a government-owned company engaged in the business of implementing various types of rail infrastructure projects assigned by the Ministry of Railways has witnessed its share price moving up by 21.1 times over the last five years. Every ₹1 lakh invested in 2020 would have been ₹21.1 lakh today! 

Several key factors contributed to this strong performance, transforming these once-overlooked entities into market favourites. One of the primary drivers was the Indian government’s renewed focus on infrastructure-led growth. With massive capital expenditure allocated towards sectors such as railways, defence, energy, and roads, PSUs operating in these segments saw their order books swell. Companies involved in capital goods, engineering, and logistics benefited directly from this policy thrust, enhancing their revenue visibility and long-term growth prospects. 

Another major catalyst was the government’s push for strategic disinvestment and privatization. These initiatives not only unlocked value but also led to improved corporate governance and operational efficiency. Investors began to view PSUs as more agile, profit-driven businesses, a perception shift that was further supported by consistently high dividend payouts and improving return ratios. Moreover, PSU banks, which had long underperformed, staged a strong comeback. Supported by robust credit growth, lower non-performing assets (NPAs), and better provisioning coverage, these banks delivered significant earnings growth, drawing investor interest back into the sector. 

The rally was also valuation-driven. Many PSU stocks were trading at low price-to-earnings multiples compared to their private counterparts, offering an attractive mix of earnings visibility, high dividend yields, and potential for re-rating. Global tailwinds, such as the surge in commodity prices and India’s growing emphasis on energy security, added further momentum, especially for energy and oil & gas PSUs. In summary, the PSU rally was powered by structural reforms, fiscal stimulus, governance improvements, and valuation comfort. This created a perfect storm of opportunity, rewarding long-term investors who remained patient through the previous years of underperformance. 

The S&P BSE PSU Index soared around 25 per cent during the April to June 2024 period, coinciding with the lead-up to the Lok Sabha elections. A major driver of this rally was investor optimism rooted in expectations that the incumbent government would retain power. This sentiment was particularly positive for the PSU sector, as continuity in political leadership was seen as a sign that ongoing reforms, capex momentum, and privatization efforts would remain on track. 

Market participants believed that PSUs would not face policy uncertainty or strategic disruptions—concerns that often arise during election cycles. As election results confirmed the continuation of the government, the rally gained additional strength, pushing the PSU Index to a record high in July 2024. However, this exuberance was short-lived. After hitting its peak in July, the PSU sector began to face a sharp reversal. Profit booking set in, valuations appeared stretched, and broader market sentiment turned cautious amid global uncertainties and economic growth concerns. 

What Turned the Tables for PSUs? February 2025 turned out to be one of the most challenging months for the PSU sector, with the S&P BSE PSU Index witnessing a steep decline of nearly 15 per cent in just a single month. Ironically, the trigger for this sharp correction was the Union Budget—an event that had traditionally acted as a catalyst for PSU stock rallies in the past. Investors had entered the Budget season with high expectations, hoping for continued thrust on capital expenditure, strategic disinvestment plans, and policy continuity aimed at boosting public sector enterprises. However, the actual announcements fell short of market hopes. 

The Union Budget marked a notable shift in the government’s policy priorities, emphasizing boosting consumption and rural demand. Instead of allocating large funds to new infrastructure or defence projects, the Budget focused on increasing disposable income in the hands of rural households and the urban middle class through targeted welfare schemes, subsidies, and income support measures. This shift in fiscal stance came as a disappointment to investors who had priced in another year of strong government-led growth and support for PSUs. The result was a broad-based selloff across key PSU segments such as power, railway, defence, and capital goods. 

The selloff has dragged Indian PSUs down to significantly lower levels over the past few months. Despite witnessing a notable recovery in April 2025, the broader PSU basket continues to reflect deep cuts, with many stocks still trading 50-60 per cent below their 52-week highs. This has led to a key question emerging among investors: Is this a golden opportunity to accumulate quality PSUs at a discount, or is it a classic case of a falling knife that could inflict deeper losses? 

PSUs: Near-Term Pains, Long-Term Potential

Despite the recent weakness in the PSU segment, it would be premature to write off the sector. In fact, many of these companies continue to hold strategic importance in India’s



economic and infrastructural development. From energy and defence to heavy engineering and banking, public sector undertakings remain central to the country’s long-term growth agenda. It is important to recognize that the PSU sector’s underperformance in recent months has largely stemmed from shifting policy priorities and global uncertainties—not from fundamental weaknesses. Most leading PSUs have robust business models, government backing, strong balance sheets, and a clear role in critical sectors of the economy. 

These companies are not only wealth creators but also nation builders, playing a pivotal role in implementing large-scale projects and ensuring service delivery across sectors where private participation remains limited. Investors should view the recent correction as part of a larger market cycle rather than a structural decline. Historically, PSUs have rewarded patient investors, particularly those who entered at attractive valuations and stayed through the cycles. The current environment— characterized by value-driven stock prices and attractive dividend yields—could offer a compelling entry point for long-term investors. 

Moreover, the government’s ongoing focus on infrastructure development, energy transition, and self-reliance in defence and manufacturing is expected to keep PSU demand strong in the years ahead. Any revival in capex allocation or sectorspecific policy push could once again drive momentum. In such a scenario, investors are advised to stay selective. Focus on fundamentally sound PSUs with consistent cash flows, governance improvements, and sectoral tailwinds. Instead of exiting in panic, a staggered investment approach may help navigate volatility while building long-term positions. Shortterm pain aside, the future for PSUs remains bright—rooted in their strategic role in India’s growth journey and the structural reforms that continue to enhance their competitiveness. 

DSIJ’s Annual Tribute
Recognizing the vital role Public Sector Undertakings (PSUs) play in shaping India’s strategic and economic growth, we at Dalal Street Investment Journal (DSIJ) take pride in celebrating their achievements each year. With this special feature dedicated to PSUs, we are delighted to present our annual tribute to the best-performing public sector enterprises across the country. Through meticulous analysis of multiple parameters, we have identified the PSUs that truly stand out. We believe these recognitions go beyond numbers—they highlight resilience, vision, and commitment to long-term value creation. Read on to discover the methodology behind our rankings and meet the PSUs that have earned their place in the spotlight! 

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 per cent) is given to Operating Profit and Net Sales each and then the remaining weightage (20 per cent) 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 FY24. For most efficient category, we have considered business per employee, profit per employee and Return on Asset (RoA) for FY24. 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. We also rank the companies to ensure that the best balance sheet is recognized, with liabilities sufficiently covered by reserves and balances. 

PSU Roll of Honour :- Click here to download Databank in PDF
PSU Financial :- Click here to download Databank in PDF