5 PSU Stocks to Invest for FY2022

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5 PSU Stocks to Invest for FY2022

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This is S&P BSE PSU Index that surged 54% since Oct 2020.

In February 2021, PSU index posted its biggest monthly gain (Up 23%) in nearly 7 years, while Nifty 50 and Sensex managed to gain a mere 4.08% and 5.85% respectively.

Generally investors don't really expect much returns from PSU stocks and enjoy high dividend yield  ranging from 8-14%. NLC Indian has dividend yield of whopping 14%, Indian Oil Corporation Ltd gives 10.6%, Oil India 8.86% etc (All at CMP).

Question is why PSU stocks are on fire?

Privatization and Valuation.

To understand the same let's go back to 2003 when Hindustan Zinc was sold by Government of India to Vedanta Limited. Govt sold 45% of Hindustan Zinc for Rs 769 cr in 2002. Its 30% stake was worth Rs 27,000 cr in 2019 and Today they are one of the world's largest integrated producers of zinc and are among leading global lead and silver producers.

Process is very simple,

Disinvestment > Valuation > Re-rating

Govt sets the disinvestment target in yearly budget to sell some its stake in PSUs to private players to raise funds to fund the economy.  They valuate the company and the stock becomes the candidate of re-rating. Big brokerage houses raise the targets based on financials, valuations & future potential, and investors start buying them in bulk, share price shoots in the expectation of optimum utilization of the resources by the company which ultimately increase the revenue and so the Net profit. So Win-win-win deal for Government, Investors and of course for the private player who bought the stake.

In Budget 2021, Govt sets divestment target of Rs 1.75 trillion. Prime Minister Narendra Modi had said that the plan is to monetise 100 government and PSU-owned assets worth a Rs 2.5 trillion ‘investment opportunity’.

India still has around 235 PSUs. About half are in manufacturing and mining, and the rest are in the service sector—transport, telecommunications, financial and technical services.

“When the government engages in business it leads to losses. The government is bound by rules and lack of courage to take bold commercial decisions.” -  Hon'ble PM, Shri Narendra Modi

With the vision of “maximum governance, minimum government”, The strategic sectors, in which the Government wants to keep a bare minimum presence and are to be privatized as per NITI Aayog’s list include: Coal, Petroleum, Power, Atomic energy, Space, Defense, Banking, Insurance, Financial services, Transport and Telecommunications.

As per FM Nirmala Sitharaman, a number of transactions namely Bharat Petroleum Corp, Air India, Shipping Corp of India, Container Corp of India, IDBI Bank, BEML Ltd, Pawan Hans, Neelachal Ispat Nigam Ltd, among others, would be completed in 2021-22.

What happens to the stock price?

In November last year, the Cabinet had given an in-principle approval for strategic divestment of Shipping Corp of India and Container Corp of India and rest is history. Stock price zoomed.

5 PSU Stocks for FY2022:

(Current Price: Rs 434 , Target price: Rs 650 , Tenure: 1 Year)

Govt approved the sale of its entire 52.98% shareholding in BPCL, along with management control transfer. The decision to privatize BPCL is based on the reasoning that the presence of a private sector player would break the state-controlled oligopoly and benefit consumers. That's right, if the oligopoly became more competitive with the material presence of a private sector participant that would compete to enhance its share while bringing best practices to the industry.

  • Company has been maintaining a healthy dividend payout of 66.66%.
  • The company is India's 2nd largest downstream oil company and is ranked 275th on the Fortune list of the world's biggest corporations as of 2019.
  • Dividend yield 4.85%

Privatization of BPCL will be completed in FY22 post that? Disinvestment > Valuation > Re-rating

Buy BPCL, target price Rs 550: Nomura, India

(Current Price: Rs 52 , Target price: Rs 90 , Tenure: 1 Year)

Four big reason to select BHEL:

  • One recent report valued BHEL at 45,000-50,000 Crore. (Current Market Cap ₹ 18,107 Cr.)
  • BHEL has emerged as the lowest bidder (Rs 10,800 crore) for the fleet mode tender floated by Nuclear Power Corporation of India Ltd (NPCIL) for the 6x700 MW Turbine Island Package Projects. (This contributes 10% of its overall order books).
  • BHEL has a land bank of 14, 000 acres which is quite tremendous all over the country.
  • The government has a 63% stake in BHEL. The government is trying to reduce this stake. The government hopes that it will be able to raise 30000-35000 crore rupees through BHEL. Work on the disinvestment of the company will start at a rapid pace from the beginning of the financial year 2022.

3) State Bank of India
(Current Price: Rs 372 , Target price: Rs 600 , Tenure: 1 Year)

Four big reasons:

  • Revises earnings estimates higher by 15-26% and expects RoEs of 14% by FY23.
  • Raises EPS estimates by 77%, 13% and 14% for FY21, FY22 and FY23, respectively.
  • Projects RoA, RoE of 0.8% and 14.5% by FY23.
  • Strong operating performance, controlled slippages and higher coverage provides comfort.
Source: Bloombergquint

(Current Price: Rs 45.75 , Target price: Rs 75 , Tenure: 1 Year)

Five big reasons:

  • Stock is debt free.
  • NBCC’s order book (OB) at the end of December 2020 was at 62,000 crore.
  • NBCC has awarded projects worth 9,600 crore during
    YTD FY21. Another ~3,000 crore is in the pipeline and is likely to be
    awarded over the next two months.
  • The management expects continuance of healthy bidding activities with 10,000-12,000 crore to be tendered out by them in FY22E. Currently, | 18,500 crore worth of orders are under execution stage (excluding recently awarded projects).
  • Multi year Breakout on charts with huge volume.

5) Engineers India Limited
(Current Price: Rs 74 , Target price: Rs 110 , Tenure: 1 Year)

Five big reasons:

  • Order Book: The current order book is good enough to support growth. It is sitting on an order book of close to Rs 8300 crore, which is close to three times its annual revenues.
  • Valuation: Engineers India is trading at 8 times its FY22 estimated earnings, which is quite attractive, in the light of the recovery in business
  • Dividend Yield: 6.97 %
  • Zero Debt
  • Multi year Breakout on charts with huge volume.

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Akshay Seth
Research Analyst (SEBI Regd.)
Linkedin | akshay.equity@gmail.com

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