Last Updated on Jan 25, 2022 by Manonmayi

When the stock markets in India were making record highs and remained flooded with volumes, one space was far from market attention – the PSUs (Public Sector Units). Despite having the government’s backing as a much-needed margin of safety, the PSU stocks were lacking lustre. 

However, the typical ignorance of the PSU stocks is history as the sector’s cheap valuations have finally caught the attention of market participants.  

So, why has the market suddenly turned favourable to PSU stocks, and what awaits them in the future? Can they prove to be a good investment? Read further to know.

This article covers:

Attractive dividend payouts

Stock investing can often come off as a giant capital killer, but since PSU stocks pay generous dividends (if not returns in terms of capital appreciation), they are generally a safe bet for market players. Moreover, the Department of Investment and Public Asset Management (DIPAM) issued a notification stating that every PSU has to pay a minimum annual dividend of 30% of PAT or 5% of the net worth, whichever is higher, to the shareholders.

PSU stocks are among the highest dividend-paying companies, with a dividend yield of 15.52%, 11.35%, 6.91% by lOC, Coal India, and GAIL, respectively, topping the dividend charts as of December 2021. The dividend yield of PSUs stocks is more than the current FD rates of most of the banks, and if this is available with the possibility of capital appreciation, who would want to miss out? 

Naturally, the rich dividend policies of most PSU stocks have made them popular on the indices.

GOI’s disinvestment plans

The government was never more serious regarding the privatization of public sector undertakings than in the last couple of years. The government is going ahead with a lot of intent, and that was on full display when the disinvestment of Air India was successfully carried out.

The GOI has laid down its plans to achieve disinvestment of Rs. 1.75 lakh cr for FY 2022. Considering that only about Rs. 9,000 cr. of the expected figure is realized till now, one can expect some huge PSUs to be disinvested soon. The market is high on the news on the possible disinvestment of BPCLBEML, CCI, SCI, and more. The government also has some really aggressive capital expenditure plans for the year FY 2022-2023. Its LIC disinvestment planning is already the biggest news of the year. 

Disinvestment is generally a  positive cue for the market, and markets react well if there is some positive development regarding the company. 

All eyes remain on PSU stocks that are touted to benefit heavily if the Government’s gamble pays off well.

Hike in the commodity prices

Prices of specific commodities have skyrocketed post the opening up of the economy. For instance, the metal and the oil & gas sector has experienced enormous demands resulting in price hikes of these commodities. Consequently, sector-specific PSU stocks namely ONGC, IOC, BPCL, NACL, BHEL, etc are benefiting from this demand hike. 

Also, most PSU companies run in highly cyclical industries like metals, energy, power, etc. The dynamics of each of these sub-sectors keep changing with climate regulations, government policies, Union Budget, and international events and markets. 

The pace of economic expansion that India is experiencing at the moment would likely push these PSU companies to newer heights, which is naturally expected to reflect on their stocks and indices. 

Just in the past year (2021), Nifty PSE has gained ~38%. This depicts the popularity that PSU stocks have gained. The momentum is only expected to continue further. 

Though the PSU space is back in the hunt, the majority of the PSU stocks, even with stellar intrinsic values, are still trading in single digits when their private counterparts are trading at higher multiples. These long-ignored PSU stocks are yet to deliver to their potential, making them a worthy bet for a strong upside.

Conclusion

PSU companies are equally in fray for sustainability and competitiveness as their private counterparts. The sector is coming off a prolonged run of consolidation and value degradation. 

Since PSU stocks belong to diversified sectors of the economy, it’s important for you to have an insight into the sector’s outlook before investing in any stock. Their recent popularity must not be the only guiding factor for investing in them. Consult your financial advisor before investing in any PSU stocks or companies.

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