psu bank shares buy: PSU bank shares: 10 multibaggers in 5 years of Modi government

The rags-to-riches story of PSU banks has provided investors with multibagger returns of up to 472% during Prime Minister Narendra Modi’s second term. During this period, investor wealth of ten of the 12 PSU banks more than doubled.

According to Ace Equity data, Indian Overseas Bank was the best performer among PSU banks, achieving a return of 472% during the Modi 2.0 period. Bank of Maharashtra and UCO Bank were next with returns of 325% and 226% respectively. Moreover, Central Bank of India, State Bank of India (SBI), Indian Bank, Canara Bank, Punjab & Sind Bank, Union Bank of India and Bank of Baroda have delivered returns ranging from 106% to 150% in the last five years.

However, the stocks of two PSU banks, Punjab National Bank and Bank of India, returned only 52% and 44% respectively during the period.

Despite the stellar returns that PSU banks have made over the last few years, the sector can still outperform its private counterparts, says Hardick Bora, co-fund manager at Union Mutual Fund.

“We note that on average, the return on equity of PSU banks is comparable to their private counterparts. However, the valuations are at a 40-50% discount. We believe that for this valuation gap to close, PSU banks will have to grow at par with private banks while maintaining the current low cost of credit,” he says.

Meanwhile, Modi’s shares are particularly popular this election season, gaining an average of 50% over the last 6 months. These are stocks of companies or sectors that have directly benefited from government policies and initiatives under Prime Minister Narendra Modi, making them attractive to investors looking to benefit from government-led growth.

This basket may continue to grow if the market celebrates a strong election result for the ruling party on June 4, CLSA analysts believe. Among the PSU bank stocks, CLSA has identified SBI, Canara Bank and Bank of Baroda as Modi stocks.

Is it worth buying Modi shares?

Analysts at Kotak Equities say the market appears to be discounting the fact that the BJP will gain around 325 seats, with most stocks trading at full-to-rich multiples and many ‘narrative’ stocks and PSUs trading at unfathomable multiples.

If the election results turn out to be below expectations, Modi’s stock will suffer the most, at least in the short term.

“Despite this expectation-driven rally, in the weeks after the election investors will be confronted with the reality that many of the positives that may have started to emerge in these stocks will only be realized gradually. This could translate into takeover gains for less patient holders of Modi shares,” CLSA said.

(Disclaimer: The views expressed by experts are their own and do not necessarily reflect the views of The Economic Times)