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    PSU index outperforms Nifty in 2022; Coal India, Canara Bank could give 17-50% return in 2023

    Synopsis

    As we look ahead, the profitability of PSUs is shooting up across domestic as well as global cyclical with a turnaround in the fortunes of PSU Banks driving the overall trend. Higher commodity prices over the past two years have aided the P&L and balance sheets of Metals/O&G PSUs.

    PSU index outperforms Nifty in 2022; Coal India, Canara Bank could give 17-50% return in 2023Getty Images
    Indian PSUs have undergone a topsy-turvy journey in the last decade despite being formidable franchises with dominant market shares of 60-80% in Oil & Gas (O&G), Financials, Utilities, Mining, and Heavy Engineering. After years of underperformance, PSU Index has outperformed Nifty50 in CY22.
    PSUs’ share in India’s market cap dropped notably to 10% in FY22 from 28% in FY12 but is now recovering and currently stands at 13%.

    Most of the Indian PSUs are present in deep cyclical industries (Metals, O&G, and Financials) and thus have inherently volatile and cyclical profitability/market-cap performance.

    The PSU story is essentially a story of two halves:

    a) During the first half (FY12-17), profitability and market-cap performances were extremely tepid, with overall PSU profits declining at 5% CAGR and the BSE PSU index generating returns at 3.3% CAGR, and b) over the second half (FY17-22), PSU profits expanded at 22% CAGR, while BSE PSU index remained flat. Subsequently, the PSU index rose 17% post-April 2022.

    b)The second-half performance was fuelled by a sharp 3x improvement in PSU profits to reach Rs 3.3 trillion from Rs 1.1 trillion over FY20-22. About half of these incremental profits came from PSU Banks alone, while Metals contributed 30%.

    Profits of PSU Banks surged 12x to reach Rs 1.2 trillion in FY22 from Rs 97 billion in FY20. The ROE of Indian PSUs improved significantly to 14.4% in FY22 from 6.6% in FY16 and is well within the reach of breaching 15% in FY23, the first time since FY12.

    A large part of the FY12-22 decade was spent cleaning up the balance sheets of Financials, which took its toll on the overall PSU profits as PSU banks formed one-third of the profit pool of Indian PSUs. This coupled with several other macro disruptions kept the PSU profit pool suppressed over FY12-20. The contribution of loss-making companies has dwindled over the past few years, which is currently at 1% of the profit pool v/s 47% in FY18.
    Way Ahead:

    As we look ahead, the profitability of PSUs is shooting up across domestic as well as global cyclical with a turnaround in the fortunes of PSU Banks driving the overall trend. Higher commodity prices over the past two years have aided the P&L and balance sheets of Metals/O&G PSUs.

    The government’s emphasis on localization and make-in-India in the Defence sector has catalyzed the improvement in the fortunes of Industrial PSUs. Consequently, we expect this recovery in PSUs’ contribution to both – profits and market-cap – to sustain.

    India’s earnings cycle witnessed a turnaround after almost a decade and continued to remain healthy amid the current macroeconomic challenges with heightened worries on rising interest rates, crude oil prices and liquidity tightening that has kept the market volatile and jittery. We estimate an FY22-24 PAT CAGR of 8% for the PSU stocks having consensus estimates.

    Stock Picks for the next 12 months:

    Coal India: Buy | Target: Rs 325 | LTP: Rs 215 | Upside: 51%
    Coal continues to be our top pick in the metals sector driven by strength in the e-auction premiums. With the onset of winter, we believe the demand for coal for power should slow down somewhat giving the company some headroom for higher non-power and e-auction dispatches. This in turn should help deliver another record set of profits for 3QFY23.

    Canara Bank: Buy | Target: Rs 340 | Stop Loss: Rs 291 | Upside: 17%
    The bank expects margins to remain healthy given the rising rate environment. Loan growth was led by the corporate segment and the outlook is encouraging as the bank is looking for decent double-digit growth in FY23E. Decline in SMA overdue and restructured portfolio provides incremental comfort on asset quality trends. We estimate an RoA/RoE of 1.0%/16.2% by FY24E.

    (The author is Head – Of retail Research, Motilal Oswal Financial Services Limited)

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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