On Thursday, shares of Cochin Shipyard soared 20% to an all-time high of ₹1,146. Mazagaon Dock Shipbuilders shares jumped by 9.51%. Indian Railway Finance Corporation, KIOCL, Power Finance Corp, REC rose by 4-7%. The BSE PSU Index gained 1.5% and the benchmark Sensex advanced 0.6%.
Money managers said the pattern of government spending in the past few years has triggered a re-rating in PSU stocks.
“Earlier, most of the PSU defence and shipping companies were primarily engaged with maintenance activities which formed a large part of their business,” said Aniruddha Sarkar, chief investment officer, Quest Investment Advisors. “However, over the last 4-5 years and more so post-covid and post the Russia-Ukraine war, government focus has been on localisation of defence manufacturing as part of Atmanirbhar Bharat programme which has led to a significant jump in order books and cash flows for all these companies.”
Money managers said the power sector has been buzzing as industrial demand is at an all-time high with limited supply.
“Prominent names in the power sector have an unparalleled asset base. When interest rates are high, capital-intensive businesses and asset heavy sectors do well,” said Paras Bothra, CIO, Ashika India Alpha Fund.
Time to be cautious?
Though the upward momentum in PSU stocks may continue till the bullish sentiment lasts, analysts urge investors to be cautious as stocks could be overvalued.
The BSE PSU Index gained 22.26% in the past six months as against the 9.8% advance in the benchmark Sensex.
“Many of the names are trading at or below book, so not yet “expensive” on valuations but investors should avoid participating just because stocks have given good returns in the short run, and need to be cognizant of near term risks,” said Lakshmi Iyer, CEO-Investment & Strategy, Kotak Alternate Asset Managers. “Unlike the last two years where almost all PSUs have done well, it may now be more prudent to be very stock specific in the PSU space.”
State-owned companies in defence, energy, mining and banking sectors could outperform the broader market over the next four to five years, said Sarkar, though the recent run up has resulted in valuations of some of them turning expensive.
“We could see some time correction over next few quarters and investors should be careful about venturing there at these levels,” said Sarkar
Bothra expects the upswing to last for the next two to three years but said defence stocks valuation looks a little stretched.