Jefferies sees more legs to PSU re-rating; RoE improvement, govt’s stance of value maximisation to be key

Even as the PSU index has outperformed the benchmarks by a huge margin, global brokerage Jefferies sees further room for re-rating in the pack. The S&P BSE PSU index has jumped around 94 per cent in the past 12 months, whereas the 30-share index Sensex has gained over 17 per cent during the period. The Nifty has rallied over 21 per cent.

The brokerage noted that the index’s outperformance has come after a decade-long underperformance before 2020.

Re-rating in the stock market parlance means that investors get interested in paying a higher price for shares as they anticipate higher earnings going forward. Usually, in such a scenario, the market and investors at large fuel further gains in a particular stock or index.

The Nifty PSE index, which is symbolic of the performance of the PSU sector, logged an impressive return of 106.58 per cent in the last one year. Some of the stocks in the pack, including REC Ltd and PFC, have skyrocketed up to 316 per cent during the period.

The global brokerage additionally stated that as the index trades at a considerable discount of 40 per cent to Nifty, there is room for further re-rating by 15 per cent.

In addition, the brokerage listed two of the prime triggers:

• Improvement in RoE: The overall RoE has gotten a boost within the pack and stands at 12–13 per cent. This is on the back of improved profitability, which will further get a boost. Further, most of the stocks in the pack have also earned EPS, or earnings per share, upgrades, except for some notable players, including ONGC, among others.
• Government’s change in stance: An increase in the capex by the government coupled with its changed stance of ‘value maximisation’ for the PSUs. 

The change is already visible from the government’s shift from the ETF mode of divestment, as noted in the brokerage’s report dated February 13, 2024. Governance improvements could drive longer-term re-ratings for state-owned enterprises, or SOEs, it added.

A comparison of PSU banks' current valuations with the 2006–2012 period suggests a re-rating potential of 25–30 per cent on price to earnings/price to book valuations, highlighted the brokerage.

Keeping in view the continuing re-rating potential of the pack, Jefferies is bullish on SBI, Coal India, and NTPC.