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The PSU saga: Resilient earnings; valuations retreat from highs

Indian PSUs have been one of the most remarkable stories of Indian capital markets after Covid-19, with several PSU sectors posting a sharp turnaround in profit and creating unexpected shareholder value. As a cohort, the PSUs posted an unprecedented 36% PAT CAGR during FY20-25, feeding into the 32% CAGR for the BSE PSU Index and a consistent expansion in PSUs’ share in overall profits to an impressive 38%. While some cyclical moderation did set in in FY25, key building blocks and an enabling environment for sustained profitable performance for several PSUs look intact. Consequently, PSU names in sectors with policy/demand tailwinds or structural growth potential should find a meaningful place in long-term investor portfolios, in our view. Our top PSU ideas are SBI, HAL, BEL, POWERGRID and COAL.

Earnings momentum remains intact over high base, except for O&G

* Earnings growth story continues, albeit with some moderation: Indian listed companies posted an impressive earnings CAGR of ~30% during FY20-25, with PSUs standing out with a stronger 36% CAGR. However, after a remarkable postpandemic rebound, PSU earnings growth moderated in FY25, weighed down by the high base of a robust 43% YoY increase in FY24 and a decline in O&G sector earnings. Overall, PSU profits inched lower by 2% YoY in FY25, though excluding the O&G sector, PSU earnings growth remained resilient at 16% YoY, following a robust 23% jump in FY24.

* Valuations ease from highs: Over the past year, the market capitalization of the BSE PSU Index hit an all-time high of INR74t in Jul’24, driven by consistent rerating trends. It then declined by 31% to INR51t in Feb’25 amid the broad market correction before recovering 25% to INR64t in Jun’25. The index’s current market capitalization stands 14% below its all-time high (up 5% in CY25YTD). Owing to the market correction (between Oct’24 and Mar’25), the P/E ratio of the BSE PSU Index has come down to 11.7x as of Jun’25 from 13.8x in Jul’24, though it is up from 9.8x in Feb’25.

* As FY25 concludes, we are revisiting our views on Indian PSUs

FY25: A year of post-rally normalization

* After a period of strong recovery from FY18 to FY24, PSUs reported a moderation in earnings in FY25. This was attributed to lower government capex due to elections in 1HFY25, weak consumption trends, volatility caused by geopolitical tensions, and reduced earnings in the O&G sector.

* During FY20-25, PSU earningsreported a stellar 36% CAGR, outperforming the Private Sector, which reported a 26% CAGR. However, due to a slowdown in the O&G sector, PSU earnings moderated 2% YoY in FY25, following a strong 43% YoY growth in FY24. Earnings growth in FY25 was led by BFSI (+22% YoY), especially PSU banks (+26%), whereas O&G (-44%) weighed on the overall performance. Additionally, the share of PSUs in the overall profit pool expanded by 850bp YoY to the highs of 37.5% in FY25. The share has been on an upward trend since FY20.

* Following a strong earnings recovery, the BSE PSU Index delivered an impressive 32% CAGR during FY20-25, significantly outperforming the Nifty-50’s 19% CAGR. However, the PSU Index remained flat YoY in FY25 and rose 4% in CY25YTD, compared to a ~5% gain for the Nifty-50 in both periods.

* Notably, the loss pool of PSUs has consistently declined over the past five years and was largely flat YoY in FY25. The contribution of loss-making companies to the overall profit pool has significantly diminished to just 1% in FY25 from 45% in FY18.

* RoE of PSU companies also moderated to 16% in FY25 from a high of 17.8% in FY24, though up from a low of 5.2% in FY18.

From weakness to recovery: Strong Rebound in the Second Half

* A decade in review (2015-2025): The PSU Index posted a CAGR of 10% during Jun’15 to Jun’25, underperforming the Nifty-50, which delivered a 12% CAGR in the same period. Notably, most of the gains for PSUs came in the latter half of the decade. The PSU Index declined 9% between Jun’15 and Jun’20, but rebounded with an impressive 32% CAGR over the subsequent four years (Jun’20 to Jun’25).

* A year of twists and turns (2024-25): Following stellar 92% YoY gains in FY24, the index was flat in FY25. However, FY25 was marked by high volatility, as the index surged 25% between Mar’24 and Jul’24, then declined 30% by Feb’25, before recovering 23% from those lows. While the recovery remains strong, the PSU Index marginally underperformed the benchmark in FY25 (-1% vs. +5%) and CY25YTD (+4% vs. +6%).

* A sharp dip followed by a strong resurgence: The BSE PSU index recorded a CAGR of 32% between Jun’20 and Jun’25, outperforming the Nifty-50 (CAGR 19%). Notably, the market cap share of Indian PSUs, which had plunged to 10.1% in FY22 from 18.8% in FY15, has since rebounded and currently stands at 15.3%. Over the same period, India’s overall market cap surged from INR94t in FY15 to INR417t in FY25 and currently stands at INR454t. During FY15-25, PSUs’ market cap increased significantly to INR69t (INR63t as of Mar’25) from INR18t in Mar’15, while the private sector’s market cap surged to INR384t (INR353t as of Mar’25) from INR76t in Mar’15.

Growth optimism anchored to a soft base

* Amid geopolitical tensions and slowing global growth, India’s macroeconomic outlook presents a contrasting picture. India’s nominal GDP grew by 9.8% in FY25, surpassing market expectations, and is projected to accelerate further to 10.8% in FY26.

* Although corporate profit growth moderated in FY25 due to a high base set in FY24, a slowdown in government spending during 1HFY25 amid elections, weak consumption, and volatile exports amid global uncertainties, we expect a gradual recovery ahead. This rebound is likely to be supported by increased government spending and continued focus on infrastructure and capex, stronger order books, and a favorable monsoon season. Additionally, the government’s focus on localization, increased capex, and the ‘Make-in-India’ initiative in the defense sector will continue to drive growth for industrial PSUs. Consequently, we expect PSU contributions to earnings and market capitalization to remain stable or improve going forward.

* For our MOFSL PSU Coverage Universe (~72% of India’s PSU market cap), we estimate a 10% PAT CAGR over FY25-27, primarily driven by the BFSI and O&G sectors, based on conservative assumptions relative to the FY25 base. Logistics, Capital Goods, and Metals are also expected to contribute positively. Incremental profit growth is likely to be led by BFSI (53%), followed by O&G (20%) and Metals (12%).

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