Nifty PSE index surges 81% in a year with 4 stocks including REC, PFC surging over 100%; should you invest?

Public sector stocks have emerged as notable outliers, garnering favor from investors in the last 1 year. The Nifty PSE index has soared 81 percent in this period as against a 21 percent rise in benchmark Nifty. Public Sector Undertakings (PSUs) have experienced robust gains propelled by substantial order inflows, reflecting the government's emphasis on initiatives such as Atmanirbhar Bharat and Make in India.

This positive trend has extended to other PSUs, contributing to their notable gains as well. India's state run index has added over 2 percent in January so far after an over 15 percent jump in December 2023 and November 2023 each. The index also hit its new high of 8,164.60 on January 5, 2024. It has now advanced 94 percent from its 52 week low of 4,212.05, hit on February 3, 2023.

All 20 constituents of the index have given positive returns in the last 1 year with 4 of them giving multibagger returns. has surged the most, up over 250 percent, followed by PFC, which rallied 231 percent, BHEL, up 149 percent and HAL, up 147 percent. Apart from these, NTPC, BEL, , , , GAIL, Indian Oil, NALCO and PowerGrid also jumped over 50 percent each.

Should you invest? However, despite such stellar returns, brokerage house Kotak Institutional Equities expressed its skepticism regarding the market's optimistic expectations surrounding the privatisation of PSUs, citing concerns related to policy, practical implementation, and pricing. First, the government's declared policy on PSU privatisation comes under scrutiny.

Second, past attempts to privatise PSUs have encountered practical challenges, casting doubt on the feasibility of such endeavors. Finally, the elevated prices of PSUs serve as a significant deterrent, urging caution against adopting privatisation as a compelling investment thesis for PSUs, it explained.

"We are not sure if the privatisation thesis for PSUs is an ex ante reason for or a post facto justification for the sharp run up in stock prices of PSUs in the past few months. We are surprised by the privatisation argument for PSUs in light of (1) the stated policy of the government for PSUs, (2) the practical challenges seen in the attempts to privatise BPCL, CCRI and (3) high prices (inflated valuations) of the PSUs with many PSUs trading at a large premium to their private sector counterparts, presumably the bidders for the PSUs," stated the brokerage.

It also noted that valuations of most PSUs have expanded sharply over the past few months. The high valuations of the PSUs may reduce the interest of potential bidders even assuming that the government was keen to privatise some of the PSUs. In fact, some of the possible candidates for privatisation in the non strategic sectors (metals, transportation) now trade at a large premium to their private sector peers, added the brokerage.

The case of CCRI is noteworthy, as the government had to rework several agreements between CCRI and Indian Railways to enable the privatisation of CCRI, which is yet to take place despite being cleared for privatisation in November 2019. BPCL did not see much interest among potential bidders given the sunset nature of the oil refining and marketing sector.

BPCL is a good example of the difference in approach to investment and ownership between strategic (long term view of the sector) and financial (relatively short term view) investors, explained Kotak. In essence, the brokerage suggests that these factors collectively present substantial grounds for tempering enthusiasm and exercising prudence when considering the investment potential of PSUs based on the prospect of privatisation.

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