Most PSU stocks are losing steam. Here are the exceptions.

Currently, over 30 of the 59 stocks in the BSE PSU index are in or approaching bear territory (20% below their 52-week highs), including investor favourites like BEML, Cochin Shipyard and Bharat Dynamics.

But while most PSU stocks are losing steam, some big names are going against the trend. These include Coal India, NTPC, Hindustan Petroleum Corporation, Oil and Natural Gas Corporation and a few others in the power and oil and gas sector. Their stocks are down around 1-7% from 52-week highs, while the index is down 5% from 52-week highs.

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“These are all old-economy stocks that tend to do well when the economy starts growing,” Charanjit Singh, a fund manager at DSP Mutual Fund, told Mint. “The government has been pushing hard to improve their performance, which has pushed up their valuations.”

When investors realized that PSU stocks were undervalued, there was a major re-rating, which started a bull run in the sector. However, optimism turned into euphoria, and the stock prices of these companies shot up ahead of their fundamentals, except for a few.

Power play

India’s peak energy demand was 250 GW in May 2024, breaking the previous record of 243 GW set in September 2023. The government now projects peak energy demand to reach 400 GW by 2031-32, up from the previous forecast of 384 GW. This rapid growth is driven by growth in per capita consumption, which has grown at an average rate of almost 7% over the past five years.

“Energy demand is accelerating, which bodes well for the energy sector. Energy is here to stay for the next 8-10 years,” Singh told Mint. “But we haven’t built enough capacity, and the biggest driver for energy stocks is their ability to add capacity. As more capacity additions are announced, the stocks will be reassessed.”

Against this backdrop, both NTPC and Coal India are well-positioned to meet India’s energy needs, Mint analysts said.

Also read: Centre to auction another 50 blocks of commercial coal in fiscal year 2025

NTPC, the country’s largest power generator, has an installed capacity of 76 GW in Q1FY25. The company has planned a capital expenditure of around ₹7 trillion over the next seven years on a path to 130 GW, including 60 GW from renewable energy. It currently has 21 GW of capacity under construction, including thermal, hydro and renewable power plants. Its strong capacity addition trajectory and aggressive entry into renewables will drive strong financial performance in the medium to long term, according to an ICICI Securities report.

Similarly, Coal India, a ‘Maharatna PSU’ and the world’s largest coal producer, remains India’s primary power producer, contributing 55% of the country’s energy requirements and 70% of its electricity requirements. The company aims to produce one billion tonnes of coal by fiscal 2026 to support the government’s goal of round the clock power supply. For this purpose, the company has planned a capital expenditure of ₹$1.3 trillion for 119 projects with a capacity of 896 million tons.

Analysts told Mint that NTPC and Coal India have the balance sheets and the capacity to execute their projects. Significant institutional ownership and growth potential have kept these stocks anchored to their fundamentals and prevented them from overheating.

Competitive advantage

PSUs in the oil and gas sector have a different story to tell. Volatile crude oil prices, limited pricing power and low net realization of crude oil led to a dismal earnings season for both oil marketing and oil and gas exploration PSUs in Q1FY25.

Oil prices largely hovered around $80 a barrel during the quarter, with state oil marketing companies having no influence on retail prices of gasoline and diesel ahead of the general election. In fact, ₹The 2% per litre reduction in petrol and diesel prices resulted in a reduction in the gross margin on refining, while ₹A $100 per cylinder subsidy on LPG prices under the Ujjwala scheme has eaten into their profits. Low crude oil realisation and lukewarm oil and gas production have also reduced the net profit and revenue of these companies.

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However, despite missing analyst estimates for Q1, shares of Bharat Petroleum Corporation, Hindustan Petroleum Corporation, Oil and Natural Gas Corporation and Oil India remained stable compared to defence or banking stocks. Analysts said this was because these big players were more competitive than their peers in other sectors.

BPCL and HPCL have a huge distribution advantage over private oil marketing companies, while ONGC expects to realise full production capacity of crude oil and natural gas in the Krishna Godavari basin by Q4. The demand outlook for crude oil and its refined products also remains strong, and electric vehicle penetration in India is yet to reach a significant level, analysts said.

Moreover, “going into the budget, there were serious concerns about populist measures that would drain the finances of these public sector OMCs,” Trideep Bhattacharya, president and chief investment officer, equity, Edelweiss Mutual Fund, told Mint. “However, since no populist measures were announced, investors’ worst fears did not materialise.”

All these factors put oil and gas companies in a stronger position than those in the defence, heavy engineering, rail and banking sectors, where retail euphoria remains strong for now.

“PSUs that do not have a strong competitive position and have been re-rated in the last 15 months due to the overall Goldilocks environment in the stock market may see more profit booking and more downgrades in the future,” Bhattacharya said. “We need a more nuanced view of PSUs going forward.”