Why PSU Stocks are Rallying?

Why PSU stock prices are going up?

Introduction

Post the union budget, PSU index recently posted its biggest monthly gain in nearly 7 years in February 2021. S&P BSE PSU index recently hit a 16-month high, since November 2019. The index rallied a whopping 22.5% in February 2021, recording its biggest monthly rally since May 2014, when it had zoomed 24.05%. While the Nifty 50 and Sensex managed to gain a mere 4.08% and 5.85% respectively. The total market capitalization of all PSUs stood at ₹19.45 lakh crore on Friday, the highest since 2017. There are 3 paramount reasons behind the stratospheric rally in PSU stocks, let us discuss them in detail in this blog.

Reasons behind the rally in PSU Stocks

1. Government’s Increased Focus on Privatization

• Central government’s ambitious FY22 disinvestment target of Rs 1.75 trillion. They also plan to monetize government-owned assets worth Rs 2.5 trillion.
• Government’s plan to privatize two PSU banks and increase spending on infrastructure, healthcare and farm sectors without resorting to higher taxation, has rekindled investor interest.
• In the Union Budget FY22, Finance Minister Nirmala Sitharaman announced a capital expenditure of Rs 5.54 trillion for FY22, up 26% as against Rs 4.39 trillion for FY21.
• The budget also outlined the additional financial avenues to attain the same, through setting up Development Financial Institution (DFI), monetization of infra assets and divestment plans of a non-core asset.

2. Rally in Global Commodity Prices

• The phenomenal rally in global commodity prices reflects the positive view of investors worldwide.
• Quantitative easing policies in many countries are generating liquidity which is also boosting commodity price. Investors are expecting strong global economic recovery with the massive roll out of corona-virus vaccines.
• While the commodity cycle has scripted a turn around, most of the PSUs are in commodities space.  The S&P BSE PSU index has 26.13% and 10.26% weightage of Gas & Oil sector and Metals & Mining sector respectively.

3. Cheaper Valuations & Possible Re rating

• Cheaper valuations, high dividend yield and strong cash flows of several PSUs make them ideal re-rating candidates.
• Despite a sharp rally in the overall market, PSU stocks are available much cheaper in terms of relative valuations to their respective sectors.

Conclusion

The above factors have truly piqued institutional investor interest in PSU stocks. Cheaper valuations are further expected to drive the rally. With the LIC IPO coming soon, this segment will surely garner more attention.  Let’s see how government’s implements the said agendas in the coming year. Will the government accomplish their targets or is this just a momentary rally, only time will tell.