Stock-specific approach to investing likely to pay dividends

Attractive valuations not enough to be positive on the entire sector, say experts

Shares of state-owned companies have witnessed increased investor interest in recent months. The BSE PSU index has advanced more than 27 per cent in the past three months, as compared to 22 per cent gain for the broader BSE 500 index.

While over the long term, they continue to lag peers on the returns front, attractive valuations, higher dividend yield, and hopes of improved earnings have increased the appeal of these stocks. What may improve sentiment for these stocks is the buzz around performance-based incentives.

The BSE PSU Index trades at a price-to-earnings (P/E) multiple of 10 times, which is at a sharp discount to the five-year average of 26 times. “The valuation discount to the BSE 500 Index has (further) expanded to nearly 70 per cent versus 40-50 per cent in FY16. This is despite PSUS’ profitability and the return on equity and return on capital employed matrix not witnessing a similar decline. Hence, the BSE-PSU index dividend yield continues to be significantly higher at nearly 3.8 per cent, while the BSE 500 Index dividend yield has declined to 1.2 per cent,” said brokerage firm JM Financial in a recent report.

There are prospects of an improvement in earnings as the economy gradually picks up, coupled with news that the government is planning to implement an annual performance target structure, may act as twin triggers. The latest step is looked at as a solution to tackling the problem of gross inefficiency and improving the balance sheet strength of these companies, said an analyst at a domestic brokerage.

However, investors must not make the mistake of painting the whole sector with the same brush, cautions Gurmeet Chaddha, CEO, Complete Circle Consultants. “While there is a perception of deep value in PSU stocks, we are not entirely bullish on the space and advise investors to take a stockspecific approach. One should stick to quality names with superior financials, good management (BPCL, SBI), rightly positioned to play the market cycle (Sail-commodity play) and structural tailwinds (gas companies) when investing in these names,” he explains.

Jefferies, on the other hand, is positive on State Bank of India, Container Corporation. of India (Concor), NTPC, Hindustan Petroleum Corporation, and Bharat Electronics.

Here are a few stocks tracked by multiple analysts and with return potential of at least 15 per cent:

NTPC

NTPC is the largest power utility company in India, owning and operating close to 53 Gw. Continued capacity addition of close to 5-6 Gw annually over FY21-22, improvement in collection efficiency, and transition to green energy are seen as the key positive triggers.

Coal India

Strong demand from the power sector and focus on increasing e-auction sales (profitability improvement on rising volumes/prices), coupled with high dividend yields and attractive valuations, are the main factors cited by analysts.

Steel Authority of India

The robust business outlook, aided by an upturn in the commodity cycle, captive mines and reserves, focus on balance sheet deleveraging and improving overall efficiency, and attractive valuations are the key tailwinds for the stock.

Bharat Petroleum Corporation

Its privatisation provides significant value creation optionalities from synergies and efficiency improvement, according to analysts at JM Financial. Additionally, improving fuel demand and expectations of better earnings are the triggers for the stock.

Cochin Shipyard

It is ranked as one of the top-tier shipyards in the country with ample capacity, capability, and order book to support it. The recent tie-up with Fincantieri will help the company gain technological inputs, design support, and collaboration in high-end vessels. Order book of ~13,862 crore, a healthy cash balance of ~1,400 crore and order pipeline offer growth visibility.