India Strategy : Where Money Flows – Aug`24 by Yes Securities Ltd
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PSU Stocks: Growth and Valuation Trends
We delve into the performance and trends in Public Sector Undertaking Stocks (PSUs) in India. Here's a detailed summary of the key findings:
Rise in Share of PSU Market Capitalization
* Over the past 24 months, Public Sector Undertakings (PSUs) have experienced notable growth in market capitalization, now comprising 15% of India's total market cap. This represents a 4-percentage point increase since June 2022.
* Additionally, the number of PSU companies in the top 200 by market cap has risen to 39, with 12 new entries in the last two years.
PSU Market Cap dominance in Listed Universe despite no notable change in Share of Earnings
* Core financial metrics such as Revenue, EBITDA, and PAT of PSU basket as a percentage of the total listed universe have remained unchanged.
* This indicates that the PSU market cap dominance is primarily driven by an expansion in valuation multiples rather than their earnings outperforming the listed universe.
Divergence in Valuation Multiples within PSU Basket
* Our analysis based on varied valuation metrics like Earnings CAGR, 1Yr Fwd Valuation Ratio (PE & PB) with last 5 years average reflects that Some PSUs stocks are trading at higher multiples despite slower forward earnings growth, while others present a more conservative valuation. Interestingly, some PSU banks with significant earnings growth are valued below their 5-year averages.
Shift in Institutional Holdings
* Foreign Institutional Investors (FIIs) & DIIs have reduced their stakes in PSUs. While FPIs have sold stake in large-caps but have increased their investments in small and mid-caps.
Improving ROE and Increasing Capex drive Optimism
* Few positives working in favour of PSU stocks:
1. Return on Equity (ROE) for PSU stocks has been on the rise, partially justifying the re-rating in valuation multiples.
2. Expected positive trend in earnings given the substantial capital expenditure (Capex) undertaken by these companies. Projections indicate that PSUs will dominate the Capex within the NSE 200, signaling a higher future growth and potential improvement in efficiency.
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