Top 5 Most Profitable PSU Stocks of FY23 to Add to Your 2024 Watchlist

The BSE Sensex has been hovering around the 66,000-mark. However, the disconnect between the markets and the economy has left experts puzzled, suggesting a potential bubble phase in select PSU stocks.

But there's no need to panic!

By focusing on profitable and well-established companies, you can weather the storm.

PSU stocks are shares of Public Sector Undertakings - government-owned corporations

Some of these PSU companies have a strong brand presence and a competitive edge over industry rivals.

In this article, let's look at the most profitable PSU stocks of 2023 and how they're stacked up for 2024.

#1 State Bank of India (SBI)

State Bank of India (SBI), the largest and oldest public sector bank in India, has been a cornerstone of the Indian economy for over a centuries.

In FY23, SBI's net profit crossed Rs 502.3 billion (bn), showing a growth of 58% year-on-year. The net interest income (NII) for the full year rose 20% year-on-year.

The high profit was driven by strong profitability and low credit cost.

SBI announced a dividend of Rs 11.30 per share for FY23. The return on equity (ROE) for the financial year stood at 19.4%.

Looking ahead, SBI is comfortably placed in terms of growth capital. Opportunities for lending in promising sectors under PLI scheme and renewables as well as electric mobility will be explored by SBI to diversify the portfolio.

SBI's competitive advantage lies in its extensive network and customer-centric approach. It is the biggest bank in India with more than 14,000 branches. The backing of the Government of India gives a huge boost to the lender.

Given these factors, SBI is definitely a stock to watch out in 2024.

#2 Oil and Natural Gas Corporation (ONGC)

Oil and Natural Gas Corporation (ONGC) is India's largest crude oil and natural gas company, contributing to over 70% of the country's domestic production.

It operates along the hydrocarbon value chain, discovering, producing, refining, and marketing oil and gas, and also manufactures petrochemicals.

In FY23, ONGC reported a gross revenue of Rs 1.5 trillion (tn), a significant increase of 40.9% from the previous year.

The net profit fell slightly by 3.7% to Rs 388.3 bn. This high profitability is due to higher realization on crude oil and gas and digital upgrades in the operations leading to reduced transaction processing.

ONGC declared a total dividend of 225% for FY23, translating to Rs. 11.25 per share.

To increase its production ONGC is investing Rs 60 bn in 24 enhanced oil recovery and improved oil recovery projects such as the Krishna Godavari offshore project.

The field development projects are expected to generate around 40.9 million metric tonnes (mmt) of oil, 8.3 mmt of condensate, and about 105.5 bn cubic meters (bcm) of gas over the next three to four years. This investment coupled with government's Marginal Fields Policy, opens up opportunities for ONGC create a sustained growth

Risks such as volatile crude oil prices and regulatory changes could impact its performance.

For FY24, ONGC is expected to see improved leverage as state interference is reduced.

These factors make ONGC a stock to watch out in 2024.

#3 Life Insurance Corporation of India (LIC)

Life Insurance Corporation of India (LIC), a state-owned insurance group and investment corporation, is one of the largest and oldest insurance companies in India.

In FY23, LIC reported a net profit of Rs 363.9 bn, a significant increase from Rs 40.4 bn reported in FY22. This substantial growth was primarily due to changes in surplus distribution norms and a strong sector growth outlook.

LIC declared an equity dividend of 30.0%, amounting to Rs 3 per share. The Return on Equity (ROE) for FY23 was approximately 11%.

LIC has been actively investing in technology to provide effective services, particularly to the urban population. This digital transformation is expected to enhance customer experience and operational efficiency.

With the under penetration of insurance and improving financialisation of savings, LIC is expected to maintain its market leadership position. However, it faces challenges such as declining market share and lower short-term persistency ratios.

LIC's competitive advantage lies in its strong market presence, robust business traction, and improvement in profitability due to changes in surplus distribution norms.

#4 Coal India

Coal India Limited (CIL) is the world's largest coal mining company and produces about 82% of India's total coal output.

In FY23, CIL reported a revenue of Rs 165 bn and a net profit of Rs 148 bn This was a significant increase from FY22 where the values stood at Rs 120.7 bn and Rs.112 bn respectively. FY23's profit was driven by higher coal prices and increased demand for electricity in India.

CIL declared an equity dividend of 242.5%, amounting to Rs 24.2 per share in FY23. The company also reported a ROE of 89.5% in FY23.

Looking ahead, CIL is set to play a major role in India's energy sufficiency aspirations. The Ministry of Coal has set a target for CIL to produce 1 bn tonnes of coal in FY24, a 13% growth year-on-year. This will be driven by ramping up production and incremental output from existing and new captive mines.

CIL faces several challenges in inadequate demand forecasting, transportation issues, and delays in coal mines operationalisation. Moreover, increasing global focus on reducing carbon emissions poses a risk to the future demand for coal.

CIL has a relatively low cost of production and a large labour pool. Efficiency in management and public-private partnerships can boost the company's performance.

In conclusion, CIL's strong financial performance, ambitious growth targets, and significant role in India's energy sector make it a stock to watch out in 2024.

#5 NTPC

NTPC Limited, a Maharatna company, is the largest power generator in India. With a group installed capacity of 73,024 MW, it contributes to 25% of India's total power generation.

In FY23, NTPC reported a total income of Rs 1.7 tn, a significant increase of 34.5% from the previous year. The company's profit after tax (PAT) came in at Rs 171.9 bn, up by 5.6% from FY22.

This impressive performance can be attributed to NTPC's efficient production processes, fully integrated project management system, and decades of experience in the sector.

NTPC has a strong dividend policy, with the Board of Directors recommending a final dividend of 30% of the paid-up share capital for FY23. The company also reported a ROE of 13.1%.

Looking ahead, NTPC has been making significant strides in recent developments. The company successfully commissioned the first part capacity of 50 MW out of 150 MW Dayapar Wind Energy Project Phase-I. This aligns with NTPC's future prospects of becoming a 130 GW company by 2032.

The company faces challenges such as increasing raw material prices and competition from emerging private-sector businesses.

NTPC's competitive advantage lies in its employee-friendly work culture, efficient production processes, and fully integrated project management system. However, the company faces risk factors such as rising production costs and competition from growing private-sector firms.

Given its strong financial performance, strategic growth plans, and commitment to sustainable power generation, NTPC is a stock to watch out in 2024.

Conclusion

In 2023 so far, most of these PSU stocks have shown resilience and profitability.

PSU stocks, with backing from government, often provide a safe haven during economic slowdowns. They tend to be more stable compared to small-cap and mid-cap stocks during such periods.

However, some of these PSU stocks have already run up in anticipation of their massive order books and the optimism surrounding them. Many experts are of the view that most of the positives are priced in.

If you're considering investing in these stocks, it's crucial to assess the company's fundamentals and valuations and allocate your investments wisely in fundamentally strong PSU stocks.

Also, keep in mind the overall factors impacting the company and the industry, including government policies, market trends, and economic indicators.

Historically, the Modi administration has demonstrated a commitment to pro-business policies and economic reforms, which have often buoyed the markets and, specifically, PSU stocks.

This trend can be attributed to the government's initiatives aimed at strengthening infrastructure, enhancing public sector efficiency, and encouraging domestic manufacturing under initiatives like "Make in India."

Additionally, the Modi government's continued focus on disinvestment and strategic sales of PSUs could lead to improved operational efficiencies and better market valuations, making these stocks an attractive investment.

However, it is crucial to approach this optimistic outlook with a note of caution. The possibility of a change in government brings with it uncertainty and potential shifts in policy direction, which could impact the performance of PSU stocks.

The political landscape in India is dynamic, and a change in government could lead to shifts in policy that may not favor PSUs.

We'll just have to wait and see how these developments pan out.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...