PSU stocks may emerge as great stories in 2017…

Any discussion about the key themes of 2017 boils down to the standard ones. There is banking, there are plays on digital money and then there are the beneficiaries from GST. A very important theme for 2017 could be PSU stocks. Here is why…

Expect props from the budget… 

One segment that actually gets props from the Union budget could be the PSU companies. In fact, the budget could pave the way for rethinking the long term economics of many sectors that the PSUs operate in. The last major shift happened a few years ago when the pricing of petrol and diesel was fully deregulated. This led to tremendous value creation in companies like BPCL, HPCL and IOCL. This budget could be the time for rethinking the next round of reforms for the PSU stocks. Firstly, there could be a major rethink on divestment. The government could go as high as divesting up to 49% in most PSUs. The government may also come out with a detailed policy paper on strategic sale of PSU companies. One can also expect some major reform announcements in areas like power, metals and banks and these could have some real long term positive repercussions on Indian PSUs. Lastly, one can also look forward to putting these PSU companies under more professional and independent managements, which is the missing link. That will be the first step in real reforms for the PSU companies in India.

They are actually cheap… 

Most PSU stocks in India are quoting at extremely attractive valuations. In fact, whether you look at them in terms of P/E or in terms of P/BV, they are very attractively priced with most P/Es in single digits. Considering the cash flows that most of these companies are generating and the monopoly position that they occupy, the huge discount to their private sector counterparts may be largely unwarranted. This gap could also narrow substantially during the year as reforms as discussed in the previous point start taking shape in a big way. More importantly, as earnings become increasingly deregulated, as we saw in the case of downstream oil, we can look forward to better valuations! 

Dividends could hold the key…

The big story for PSU stocks could be the dividends. Many PSU stocks like Coal India, PFC, NMDC and REC are quoting at extremely attractive dividend yields. This largely limits their downside price risk. With the government likely to fall short on its disinvestment targets this year, it may fall back upon PSU companies to declare generous dividends. The government has already made that demand from HZL and may soon follow suit with other companies. With most PSUs already at attractive dividend yields, this dividend push will only make them more salivating. That could be the big story to watch! ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline.

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