Select PSUs offer attractive risk-reward, says CLSA

CLSA believes that a lot of bad news is now priced in and select public sector undertakings offer favourable riskreward, especially as there is a risk of slowing domestic flows driving a market de-rating.

The brokerage said Oil & Natural Gas Corporation, NTPC and Coal India are its top buy ideas among non-financial public sector companies and among financials, it prefers State Bank of India. India stands out as the only emerging markets trading above its historical average but its state owned enteprises are trading close to all-time lows at a forward price to earnings ratio of 8.8 times, said CLSA.

Valuations relative the Nifty appears even more compelling at a 50 per cent discount, it added. Concern of a rising fiscal deficit, cross holdings and PSUs being called to do national duties are the key reasons for the de-rating, according to CLSA. For instance, margins of oil marketing companies were trimmed by Rs 1 per litre by the government in October 2018 to bear the burden of rising oil prices. In January that year, the government sold its 51 per cent holding in Hindustan Petroleum Corporation to ONGC to meet the divestment target.


Shares of ONGC has fallen 26 per cent in the last one year while that of NTPC and Coal India have declined 16 per cent and 20 per cent respectively. SBI has fallen 3 per cent in the last one year. In comparison, benchmark Sensex has gained 3.7 per cent in the last one year.

Although the brokerage has advised investors not to ignore PSUs, it believes that the overhang of divestment will remain.

"There is likely to be a continued focus on disinvestment receipts as fiscal pressure remains high as GST (Goods and Services Tax) collections have been weak. The government has so far only met Rs 350 billion (Rs 35,000 crore), versus a Rs 800 billion (Rs 80,000 crore) budgeted target," said CLSA.

There is possibility of more crossholding transactions such as the sale of SJVN to NTPC and REC to PFC, said CLSA.