PSU stocks’ dream-run lose steam on earnings slowdown, valuation concern

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After a strong performance in recent months, PSU stocks are now tumbling across the board due to concerns about overvaluation, slowing earnings growth, and mandatory dividend payouts.

In the last one year, PSU stocks have witnessed a sharp rally riding on bullish sentiments and monopoly business.

The BSE PSU index gained over 90 per cent in last one year, while select top performing PSU stocks have more than doubled, according to ACE data.

However, BSE PSU index dipped 837 points to 21,977 in August points against 22,814 logged in previous month.

Some of the stocks that plunged last month include Cochin Shipyard (-30 per cent), Garden Reach Shipbuilders and Engineers (-26 per cent), Mazagon Dock (-21 per cent), BEML (-19 per cent) and Engineers India (-18 per cent).

Many of these stocks paid attractive dividends based on their previous-year performance as part of their obligation to the government.

Hitesh Jain, Lead Analyst of YES Securities, said, some of the PSU stocks are trading at higher multiples despite the slower forward earnings growth, while some PSU banks with significant earnings growth are valued below their five-year averages.

Interestingly, he added, foreign and domestic institutional investors have reduced their stakes in PSUs while FPIs have sold stake in large-caps but have increased their investments in small and mid-caps.

The drop in share prices can be attributed to declining profitability in a few PSUs on a sequential basis. Rail Vikas Nigam, once a market favourite, reported a 33 per cent fall in net profit for the June quarter, down to ₹224 crore from ₹478 crore in the March quarter.

Cochin Shipyard profit was down at ₹174 crore against ₹259 crore in March. The company’s net was down 32 per cent quarter-on-quarter, despite an increase of 77 per cent year-on-year.

Better scope

The government last week accorded Navratna status to four state-owned companies.

These PSU companies upgraded to the Navratna status include NHPC, Railtel Corporation, Solar Energy Corporation and Satluj Jal Vidyut Nigam.

The Navratna was given by the Department of Public Enterprises, Ministry of Finance.

Of the four companies, three companies — Railtel, SJVN, and NHPC – are listed on the exchange. After the latest addition, the number of Navratna companies has increased to 25.

The Navratna status will help these new entrants undertake more significant PPP (Public, Private Partnership) projects and exemption from the GoI nod in some instances.