Keep PSU stocks on the radar: Analysts

Divestment hope, fair valuations, and cyclical recovery are key triggers

Analysts remain bullish on stocks of public sector undertakings (PSUS), especially the ones that are likely to be divested, and suggest investors accumulate them at current levels from a medium-to-long-term perspective.

“There are a lot of PSU stocks that have not participated in the market rally. The fall from their peak levels is a good opportunity to buy from a medium-to-longterm horizon. I am confident that the government will be able to achieve the FY22 divestment target. Due to the ongoing second wave of Covid, it may dole out some relief measures, which will cost money. To fund such initiatives, it will have to go aggressive on divestment once the market conditions improve,” says G Chokkalingam, founder and chief investment officer, Equinomics Research.

In April, the government said the timeline for disinvestment of Air India and Bharat Petroleum Corporation (BPCL) may be pushed by two-three months due to the second Covid-19 wave. It is confident of wrapping up the sale of the two companies by FY22 and meeting the disinvestment target of ~1.75 trillion during this financial year.

Selling stake in state-run enterprises will be an uphill task for the government, especially amid the ongoing pandemic that has dented market momentum, feels A K Prabhakar, head of research at IDBI Capital. He, however, has pinned his hope on the second half of this financial year when the economy emerges from the shadows of the Covid pandemic, aided by accelerated vaccination.

“The government should pluck the low-hanging fruits -- companies like Balco -- where divestment is relatively easy as compared to larger companies like Air India and BPCL. It will create positive sentiment in minds of investors, too, as regards the divestment process. Several PSUS are trading at attractive valuations that investors can buy from a medium-to-long-term perspective. They will reap gains once the divestment process gathers steam,” he says.

Besides Air India and BPCL, Shipping Corporation of India (SCI), Container Corporation of India (CONCOR), BEML, Pawan Hans, and Neelachal Ispat Nigam are some other public sector companies that are likely to see the government cut its stake in, reports suggest.

Manishi Raychaudhuri, head of Asia-pacific equity research at BNP Paribas, shares a similar view and says the government’s divestment target of ~1.75 trillion in FY22 appears optimistic but the process can get delayed to the second half of the financial year.

“For the leading PSU companies, share prices are not reflecting any deal-related premium. Against this backdrop, a delay in divestment can lead to PSU stocks’ underperformance in the near term, but attractive valuations and cyclical earnings recovery should ensure downside support to share prices in the medium term,” he said.

The prized catch among the lot, according to analysts, is state-run refiner and marketer BPCL. The stock, analysts suggest, stands a good rerating chance given its operations and vast assets, including land bank, once the company’s divestment process gathers momentum. “Our expectation on reserve price is around ~500 a share and this includes a potential dividend of ~50-60 a share out of cash proceeds from sale of its stake in Numaligarh refinery and BPCL trust share of 7.33 per cent. At this price, government stake should be worth $6.9 billion and total payout to acquirer would be between $6.9 billion and $10.3 billion, depending on what is the response to the open offer,” wrote Anubhav Aggarwal, Krati Sankhlecha and Sayantan Maji of CLSA in a recent note.