After years of underperformance, state-owned firms could be on the verge of entering the ‘value-creation’ phase, domestic brokerage and research firm JM Financials said in a recent note. In the past three years, PSU stocks have seen a correction of 38% and in the last one year a 16% correction has been recorded. However, PSU stocks have not been sitting out the recent rally on Dalal Street, gaining 36% from their March lows. “We analyse the reasons for under-performance to see if current prices offer opportunities,” JM Financial said.
The report adds that most PSU stocks are trading at a discount to historic valuations and, in some cases, even to global peers. Frequent stake sale by the government, FII selling, and major earnings hit have been cited as the reasons behind the stark underperformance. “Even after applying the historical discount to global peers, we find value in stocks such as GAIL, HPCL, NTPC, where fundamentals are improving, in our view,” the brokerage firm said.
Target price: Rs 143
NTPC is JM Financial’s top pick which trades at a 53% discount to global peers / ~50% of its historic multiple (at 0.7x FY22E BV) despite 15% EPS CAGR (FY20-22). The brokerage firm said that NTPC’s market capitalization fell by 23% despite delivering a 8% PAT CAGR over financial year 2015 and 2020, largely led by ESG concerns and repeated Govt stake sale. “For NTPC, with government stake falling to 51%, we see diminishing risk of a fresh stake sale. ESG concerns for NTPC are alleviating as it transitions to a higher mix (25%) of green energy by setting up 32GW of renewable energy (RE) by 2030,” the report said. The target price of Rs 143 would translate to a 45% upside from current levels.
Target price: Rs 125
JM Financial has a Buy rating on GAIL due to the steady growth visibility in its gas transmission business on account of various policy tailwinds given the government targets to increase the share of gas in India’s energy mix to nearly 15% by 2030. “Further, recent recovery in crude price has improved earnings visibility on its gas trading and downstream businesses,” the report said. At the current prices, GAIL trades at 1.1x FY22E P/B (3-yr avg: 1.5x) and 12.2x FY22E P/E (3-yr avg: 12.7x). JM Financial sees an 8% upside potential for the stock.
Target price: 235
HPCL is being preferred owing to its high marketing exposure. The brokerage firm expects gross refining margin (GRM) to continue to be subdued in the near-to-medium term. This is aided by the large global oil demand contraction likely in calendar year 2020 and expectation of demand recovery to pre-Covid levels only in 2022; along with ongoing capacity additions, and resultant excess inventory build-up. The stock currency trades at 0.8x FY22E P/B against its 3 year average of 1.2x and 10-year average of 1.0x. The target price implies a 9% upside for HPCL.