PSU stocks have regained momentum in recent sessions as expectations rose that the government will resume its capex spending in H2FY25, following the BJP-led NDA’s electoral win in the key Maharashtra assembly elections, which has fueled investor optimism.

In just the last eight trading sessions, the BSE PSU index jumped 7.5 per cent, with the majority of the gains coming from the defence pack, such as Cochin Shipyard and Bharat Dynamics.

Between June and October 2024, PSU stocks were hammered by Dalal Street investors due to concerns over a slowdown in government capital expenditure. However, in its recent report, domestic brokerage firm Elara Capital stated that this slowdown is temporary and not a long-term trend.

Elara Capital emphasised that any concerns about the PSUs’ performance due to the moderation in capex are unwarranted. The brokerage remains structurally and cyclically positive on the PSU sector, as it expects a strong recovery in the asset cycle, which, in turn, will result in a robust earnings cycle for the next three years.

This is because a PSU asset cycle follows the GOI spending cycle with a two-year lag, thereby lending the brokerage confidence that the cycle is not done yet.

The government’s capex cycle is expected to remain visible throughout this decade, with the government focusing on the debt-to-GDP ratio as its ‘fiscal anchor.’ The brokerage forecasts an improvement in the GOI capex-GDP ratio, expecting it to rise to 3.7 per cent by FY30E and further to 4.0 per cent by FY33E, compared to 3.4 per cent in FY25E.

Additionally, the policy drivers remain intact, and sectors with policy triggers and funding support remain highly compelling, it added. 

Shift in PSU profit pools; oil & gas and utilities set to drive earnings

Elara Capital highlighted that while PSU profit pools in the past cycles were led by PSU banks, the drivers of earnings and profit pools in this decade are likely to be oil and gas, as well as utilities.

The power sector is expected to continue benefiting from a capex pipeline of more than ₹31 trillion until FY30E, with power demand projected to grow at a CAGR of 5.0 per cent to 5.5 per cent. This will be supported by a renewed thermal energy mandate of 80 GW and value unlocking through Renewable Energy (RE) arms of PSUs, which will continue to drive earnings in the utility sector.

In the oil and gas space, Elara expects multiple rerating triggers for companies like Oil India, OMCs (BPCL, HPCL & IOCL), and GAIL, driven by the upcoming global LNG supply, a sluggish crude oil price outlook, aggressive upstream infrastructure development, and a recovery in the refining capex cycle.

With an expected PAT of ₹572 billion for OMCs in FY25E, profitability metrics are well-positioned to support both the refining and new energy asset cycles.

Elara further highlighted that railways and defence PSUs continue to show strong traction, with the government setting a target of $21 billion for defence manufacturing by FY30, up from $15 billion in FY24. Additionally, the government has outlined spending plans of $43 trillion over the next 25 years, indicating continued strong support for capex in these sectors.

Elara identifies 18 stocks with strong policy support and funding visibility

Within the listed PSU universe of 59 stocks, 18 meet the brokerage’s investment criteria, which include policy support, funding visibility, execution capability, and operational efficiency. The brokerage is currently ‘Overweight’ on SBI within PSU Banks, as it believes the bank’s robust savings deposit metrics position it on par with large private banks.

The brokerage’s other top picks include GAIL and OMCs in the energy sector, and NTPC and Coal India, among utilities. The brokerage notes that NTPC and Coal India are well-positioned to capitalise on the ongoing thermal asset cycle expansion.

Among Oil and Gas PSUs, the brokerage is most constructive on GAIL India, citing visibility of 8 per cent to 10 per cent growth in gas transmission volumes, supported by the continued gasification of the economy. In the OMC space, it prefers HPCL due to its relatively high share of petrol and diesel sales compared to its peers, which offers higher tailwinds in a declining crude oil price scenario.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.