RISKS BENEATH THE SURGE

The surge surge in PSU stocks may hide potential valuation concerns. Investors need to be selective and focus on PSUs with strong earnings

Public Sector Undertakings (PSUs) have defied tradition by surging during a recent market rally. This surge, coinciding with broader market volatility, warrants closer examination. While the rally lifted many PSUs, their inflated valuations and weak fundamentals raise concerns about sustainability. Now is the time for selective investment, focusing on PSUs with strong performance to capitalize on the ongoing rally.

Let us first understand what has led to this rally and whether it is sustainable.

The recent rally in India’s PSU stocks has been a remarkable phenomenon, with the Nifty PSU index delivering a staggering 79% return in 2023 compared to the benchmark Nifty’s 19.8% return. Several factors have contributed to this surge, creating a perfect storm of bullish sentiment.

INCREASED GOVERNMENT CAPEX

The Indian government has significantly ramped up infrastructure spending in recent years, with the latest budget allocating a record ₹10 trillion ($120 billion) for capital expenditure in 2024. This massive investment directly benefits PSU companies involved in sectors like construction, power, oil & gas, engineering, and transportation, fuelling optimism about their growth prospects.

About two years back when private capex was down due to Covid-related stress, the government and PSUs increased significant capex to drive growth. Capex-led growth and expansion in earnings resulted in a huge re-rating of PSU stocks.

IMPROVING FINANCIALS