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Select sectors in the PSU theme will continue to do well

HomeBlogsSelect sectors in the PSU theme will continue to do well

We are happy to see the PSU theme outperform in 2022 after sighting a cyclical investment opportunity in 2019 on account of decadal low stock valuations, strong balance sheets with high ROEs and steady cash flows from operations, along with high dividend pay-outs. In CY22, we witnessed an improvement in growth in domestic facing sectors which has also helped PSUs (core to the economy) and there has been a global trend of value buying in a rising-rate environment. We remain positive on PSU banks, defence and power, despite the sharp re-rating in PSU stocks in the last couple of years. PSU banks: PSU banks registered strong earnings growth in the current fiscal year, with all key metrics like loan growth, margins, and asset quality surprising on the upside. We expect sustained strong earnings next year, with further
improvement in the return ratios. Though PSU banks have seen strong stock performance in recent
months, their valuations remain reasonable, coupled with improving ROEs (discount to private banks remains larger vs history).

Defense and Railways

We remain structurally positive on government spending and policymaking in the defence and railway sectors over the next three to five years. In the defence sector, tailwinds from the positive lists announced by the government in 2021-22 should start yielding opportunities for domestic defence companies (indigenisation). In railways, the government’s focus is expected to shift from capacity building to equipment procurement. Increasingly, we also believe the government’s focus on growing exports in both defence and railways should start becoming visible in the next one-two years. Stock performance now builds in most of the optimism from the policy and government focus. We need large order flows and earnings execution for the stocks to outperform.


After almost a decade of being in surplus, the power sector is now likely to start facing intermittent peak power deficit/ shortfall especially in peak seasons (i.e., summers). As a result, there is need for coal/hydro power capacity addition to meet the peak power demand. Moreover, to resolve the past issues of delayed payments and poor financial health of discoms, the government has been undertaking several reform measures which have already started bearing fruit. We remain constructive on the power sector across names for the next two-three years basis visibility of capacity.

Oil & Gas

This sector has underperformed in last one year on adverse macro conditions like global energy crisis, geopolitics and COVID restrictions. Given the weaker crude oil price, strong refining margins, windfall tax collection, earnings visibility will improve going forward. With the valuations being that of the regulated era, we believe there is a tactical play on upstream and OMCs in the coming year. Overall, select sectors in the PSU theme will continue to do well in the coming year. We remain constructive on India’s economic growth story in the next few years and that bodes well for PSU companies (core to the economy) like banks, power, industrial and manufacturing sectors.

Source: DHAVAL GALA Fund Manager, Aditya Birla Sun Life AMC (co-manages Aditya Birla Sun Life PSU Equity Fund), Value Research Online !


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