PSUs staged a comeback after a decade of underwhelming performance, driven by the spectacular rally in PSU banks this year. The 13-stock Nifty PSU Bank index climbed a whopping 66.27% on a year-to-date basis, making it one of the best-performing sectoral
indices this year. In fact, the surge led the Nifty PSE (Public Sector Enterprises) Index to outperformance over the benchmark Nifty 50 index.
PSU banks which had seen muted earnings due to the non-performing assets crisis witnessed a robust recovery and reported accelerated improvement in their bad loans ratio. These banks now have better capital metrics and are cleaning up their balance sheets. They are getting back to lending to corporations and the retail segment in an attempt to reclaim market share lost to private peers in the past four to five years.
According to a report by Motilal Oswal, a large part of the FY12-22 decade was spent in cleaning up the balance sheets of the financial sector, which took its toll on the overall PSU profits as PSU banks formed one-third of the profit pool of Indian PSUs. Coupled with several other macro disruptions, this kept the PSU profit pool suppressed over FY12-20.
Rahul Shah, VP-Equity Advisory, Motilal Oswal Financial Services in an interview with the Economic Times said, “PSU Banks after a long time are back in focus. We should continue holding on to the PSU banks and the earnings cycle has revived which was visible in Q2. These should be clear winners in Q3 earnings as well.”
According to a report by ICICI Direct, despite the strong rally in the stocks of PSU banks, their valuation is still reasonable. It said that there has been a turn around with comfort on asset quality; reversal of treasury losses, credit growth pick-up and just adequate capital position for most of them, post the phase of significantly higher gross non-performing assets (GNPA), treasury mark-to-market (MTM) losses, lower capital and sub-par growth.
Written by Simran Bafna
