Up to 930% rally! Is it still right time to lap up PSU stocks?

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Shares of public sector companies have been buzzing on Dalal Street due to their superlative performance since March 2020. Market watchers believe that the beginning of the new capex cycle, falling non-performing assets (NPA) and plans of strategic sales in government companies gave a fillip to PSU names.

There are hopes that PSUs are moving from under ownership to over ownership which may further strengthen the uptrend going forward.

Top gainers With a rally of 927%, Bharat Immunologicals and Biologicals Corporation has emerged as the top gainer in the list. The scrip has jumped to Rs 60.60 on May 21 from Rs 5.90 on March 24 last year. In the recent update, the government has given its nod for manufacturing of Covaxin by Bibcol at its plant in Uttar Pradesh’s Bulandshahr. Covaxin is an indigenous vaccine developed by Bharat Biotech. According to reports, the Bharat Immunologicals and Biologicals Corporation Limited (Bibcol), a PSU of the Centre, is expected to produce 1 crore doses of Covaxin every month, starting September.

It was followed by Hindustan Copper (up 805%), Hindustan Organic Chemicals (up 520%), Steel Authority of India (up 460%), MMTC (up 383%) and National Fertilizers (up 316). Other PSU companies (ex-banking) have also between 15%-300% during the same period.

Commenting on the rally in PSU space, G Chokkalingam, Founder, Equinomics Research and Advisory said, “PSUs were lagging behind other small and midcap stock rally. Now it is a catch-up rally. The upward movement is likely to continue in smallcap PSUs which are non-strategic (not related to the defence sector) in nature. Severe fiscal constraints would eventually lead to strategic sale of such smallcap PSU.”

On the other hand, banking players have also delivered a robust return to investors during the same period. Indian Bank has soared 225% to Rs 140.55 on May 21 from Rs 43.30 on March 24 last year. Other PSU lenders including Bank of Maharashtra, Bank of India, Indian Overseas Bank, The Jammu & Kashmir Bank and State Bank of India (SBI) have also rallied over 100% during the same period.

Sanjiv Bhasin, director, IIFL Securities said, “Improvement in the balance sheet and beginning of new capex cycle have supported PSUs in the last 12 months. Besides, worst performing sectors like power, steel and infra are doing excellent now. Falling NPAs, rising net interest margin and sharp expansion in credit book over the next 2-3 years will support lenders. Overall, we expect the outperformance will continue in the PSU pack.”

Will government achieve the divestment target? The Budget for 2021-22 has set a disinvestment target of Rs 1.75 lakh crore, higher than the Rs 32,000 crore estimated to be garnered in FY21. Of the Rs 1.75 lakh crore, Rs 1 lakh crore is to come from selling government stake in public sector banks and financial institutions. Rs 75,000 crore would come as CPSE disinvestment receipts.

Analysts believe that the government can attain the divestment target for FY22. “Yes, it is possible to achieve the divestment target. Since debt financing has soared due to the Covid pandemic, the government would be forced to do the strategic sale of several small and midcap PSUs,” said Chokkalingam.

According to PTI, the process of privatisation of Air India, BPCL, Pawan Hans, BEML, Shipping Corp and Neelachal Ispat Nigam Ltd (NINL) has already moved to the second stage after the government received multiple expressions of interest (EoIs) for these CPSEs.

“PSUs have re-rated because of divestment plans. Government is aggressive on monetising plans. BPCL is hovering at around Rs 470. It was Rs 345 when the news of privatisation came,” said Bhasin.

In her Budget speech, Finance Minister Nirmala Sitharaman said strategic disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, NINL, among others, and IPO of LIC would be completed in 2021-22.

Stocks to buy Bhasin told Money9.com that he has been bullish on Punjab National Bank, Canara Bank, State Bank of India and NBCC. He has a target price of Rs 600 for SBI and Rs 100 for NBCC. “Construction activity will pick up and execution will be the key,” said Bhasin.

Chokkalingam is bullish on Moil and Balmer Lawrie Investments. He said that Moil holds nearly 100 million tonnes of manganese ore reserves, while Balmer Lawrie Investments holds a majority stake in Balmer Lawrie Company which holds huge real estate backed logistic infrastructure assets.