PSU stocks rally driven by retail investors

The BSE PSU Index has seen a significant 21% YTD growth, with a report attributing the rally to retail investors and foreign brokerages. The report also highlights the preference of FIIs for private companies over PSUs and the reduction of ownership in PSU names by domestic institutional investors.

According to the report, FIIs have historically favored private companies over PSUs, and this preference has remained consistent in the current cycle. Domestic institutional investors, on the other hand, have been reducing their ownership in PSU names while increasing their ownership in non-PSU companies over the last year.

The report identifies specific instances of FII and DII crowding in certain PSU names, with NMDC, Bharat Electronics, HAL, BOB, Canara Bank, Indian Bank, and Union Bank being highlighted as examples of FII crowding, while Gujarat Gas, National Aluminium Co., Container Corp, Indian Bank, Bank of India, and HUDCO are cited as instances of DII crowding.

Despite the rally in PSU stocks, the report suggests that there are limited opportunities within the PSU portfolio, with a focus on high momentum and dividend yielding stocks with reasonable valuations. The report also notes that while the PSU pack looks better fundamentally compared to history, consensus appears to be overly bullish.

The PSU Index has seen improvement in ROEs and margins, with many PSU names stacking up well on dividends compared to non-PSUs. However, the report highlights the declining overall index dividend yield, which currently sits at 2.8%. Earnings have been a major driver for PSU names, but analysts are cautious about the overly bullish earnings outlook, given that actual earnings have been relatively flat for a while.

In conclusion, while the PSU stocks have experienced a significant rally, the report suggests that there may be limited opportunities within the PSU portfolio. It also highlights the potential risks associated with the overly bullish consensus on earnings outlook. As the PSU Index continues to perform well, it will be important to monitor how these dynamics evolve in the coming months.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in) – IANS biz/san/prw