Top 5 Undervalued PSU Stocks to Watch Out for as 2025 Begins

The calendar year 2024 witnessed a remarkable rally in the public sector undertaking (PSU) sector, with the BSE PSU index reaching a record high of 22,801 in July 2024 from the lows of 15,300 seen in January 2024.

The index gave returns north of 20% in the last 1 year even after falling from its highs.

Currently, the index trades at 19,000 levels, well below the peak of July 2024.

The recent fall has created opportunities for smart investors to look for undervalued companies with strong backing of the government.

Keeping that in mind, let's look at the top five undervalued PSU stocks that remain attractively priced and hold immense promise for long-term wealth creation.

These stocks are filtered using Equitymaster's powerful stock screener and on the basis of their current price to book value (P/BV) ratios.

#1 Bank of India

First on the list is Bank of India. The bank's business segments include treasury operations, wholesale banking, and retail banking.

It's the sixth largest Indian PSU bank with advances of Rs 5.85 trillion (tn) as of FY24.

At the current price of Rs 103, the stock looks undervalued on both the price to earnings (PE) and price to book value (PBV).

Bank of India's PE ratio stands at 5.93x while the industry PE stands at 9.21x. The PBV ratio is also lower at 0.89x, compared to the industry average of 1.38x.

The 5 year median PE ratio for the stock is 8.6x whereas the 5 year median PBV is 0.5x.

While the stock has taken a hit temporarily, its fundamentals remain intact.

The bank's net profit has grown at a 5-year compounded annual growth rate (CAGR) of 26% due to good control over operating costs and the maintaining off the net interest margin. Its return on equity (RoE) stands at 10%.

Looking ahead, the bank expects global credit growth of around 14% and domestic credit growth of around 15% for FY25. Domestic deposit growth for FY25 is projected to be around 12-13%.

Bank of India plans to open over 200 branches in FY25, which will support its current account savings account (CASA) growth.

The management believes that net interest income has bottomed out and will improve in the coming quarters.

The bank expects better credit growth and disbursals in Q3 and Q4 due to the busy season. The net interest margin (NIM) guidance for FY25 is around 2.9%.

The management believes credit costs for FY25 will be maintained at 0.7%, and guidance for the slippage ratio for FY25 is around 1.4%.

Here's how the stock price has performed in the past 1 year.

For more details, check out Bank of India's financial factsheet.

#2 Oil and Natural Gas Corporation (ONGC)

Second on the list is Oil and Natural Gas Corporation (ONGC). It's an Indian multinational crude oil and natural gas exploration and production company, headquartered in New Delhi.

ONGC is India's foremost producer of crude oil and natural gas, contributing approximately 63% to the nation's domestic output. It operates in both the upstream and downstream segments of the oil and gas sector.

Its presence within India's energy landscape is highly significant, positioning the company as a pivotal entity in the sector.

The company had a few bad quarters in FY25. Its consolidated net profit for Q2 FY25 was Rs 98.8 billion (bn), a decrease of 38.9% from Q2 FY24.

For the first half ofFY25, its consolidated net profit was Rs 196.9 bn, a decrease of 41.5% YoY. This decrease was primarily due to a decline in the profits of its subsidiaries, HPCL and MRPL.

After these bad quarters, the stock is trading at a PE ratio of 7.45, slightly lower than the industry PE of 7.92. The company's PBV is also lower at 0.86, compared to the industry PBV of 1.

At the current price of Rs 240, the company looks undervalued due to the recent fall in its price, but the long-term fundamentals remain intact.

According to the commentary given by its management, oil and gas production is expected to increase to 44.9 million tons of oil equivalent in FY26 and 46.2 million tons of oil equivalent in FY27.

ONGC's capital expenditure guidance for FY26 and FY27 is Rs 360 bn.

The management also expects a turnaround in its subsidiary OPaL's performance from FY26 onward, barring any unforeseen changes in product or feedstock prices. OPaL had a utilisation rate of 94% in Q2 FY25.

ONGC is taking proactive steps to counter the decline in production from matured and marginal fields by implementing well intervention and enhanced oil recovery techniques.

It is also looking at newer horizons and focusing on green projects.

Here's how the stock price has performed in the past 1 year.

For more details on its financials, check out ONGC's financial factsheet.

#3 Steel Authority of India (SAIL)

Steel Authority of India (SAIL) is a company engaged in the manufacturing and sale of a range of steel and other products.

The company has a large dealership network across India and also exports products to international markets.

SAIL owns iron ore mines, as well as plants for producing refractories and ferro-alloys.

The past few months have seen steel prices crashing to levels last seen in March 2020. This has created downward pressure on the stock as the company is heavily dependent on global steel prices for making profits.

This downward pressure has led to stock price quoting at Rs 117, at a PE ratio of 19.8, lower than the industry PE of 39.4. The company's PBV is also lower at 0.87, compared to the industry PBV of 2.4.

The 5-year median PE ratio for the stock is 11.7 whereas the 5-year median PBV is 0.7.Here's how the stock price has performed in the past 1 year.

SAIL's net profit has grown at a 5-year compounded annual growth rate (CAGR) of 6%. The company's return on equity (RoE) stands at 6.4%.

SAIL's management expects steel demand to remain strong due to infrastructure spending by the Indian government. The company anticipates revenue and profit margins to improve in upcoming quarters.

SAIL is working towards reducing its costs by diversifying its coal sources.

The company also has a plan to increase its crude steel production capacity from 19.1 million tons per annum (mtpa) to 35.65 mtpa by 2031.

The stocks trajectory can change if steel prices rebound.

For more details, check out SAIL's financial factsheet.

#4 Union Bank

Fourth on the list is Union Bank, a major public sector bank in India.

The bank provides a variety of financial services, including short and long-term credit for agriculture, small industries, and the tertiary sector.

It offers corporate banking solutions like trade finance and project financing, along with services for non-resident Indians (NRIs), such as treasury and remittance options.

Union Bank has reported strong financial performance in recent quarters.

For the September 2024 quarter, the bank achieved its highest ever operating profit and net profit.

Operating profit for Q2 FY25 reached Rs 81.1 bn, a 12.4%YoY. Net profit for Q2 FY25 was Rs 47.2 bn, up 48.8% YoY.

The stock price is quoting at Rs 119 at a PE ratio of 5.93, significantly lower than the industry PE of 9.21. The company's PBV is also lower at 0.89, compared to the industry PBV of 1.38.

The 5 year median PE ratio for the stock is 6.6 whereas the 5 year median PBV is 0.9.

The banks Return on Assets (RoA) increased from 0.69% in FY23 to 1.03% in FY24.

Here's how the stock price has performed in the past 1 year.

Union Bank has effectively managed its asset quality, as reflected in the decline of its gross non-performing assets (NPA) ratio. This ratio decreased to 4.76% in FY24 from 7.7% in FY23.

Similar trend was observed in the bank's net NPA ratio, It reduced from 2% in FY23 to 1.03% in FY24, showcasing the bank's efforts in controlling bad loans.

The PSU bank has maintained a robust capital position, as evident in its capital adequacy ratio (CAR) of 17.1% in FY24.

Looking ahead, the bank is planning new product launches tailored to senior citizens, offering competitive rates and benefits.

For more details, check out Union Bank's financial factsheet.

#5 Bank of Baroda

Fifth on the list is the Bank of Baroda - a public sector bank in India. The bank primarily serves micro, small, and medium enterprises (MSME) and agriculture, as well as established corporates.

Bank of Baroda has a significant international presence. The bank also has subsidiaries and joint ventures, including Nainital Bank, IndiaFirst Life Insurance Company, and Baroda Rajasthan Kshetriya Gramin Bank.

At the current price of Rs 247, the stock is trading at a PE ratio of 6.37, slightly lower than the industry PE of 9.21. The bank's PBV is also lower at 0.94, compared to the industry PBV of 1.38.

The 5-year median PE ratio for the stock is 7.9 whereas the 5-year median PBV is 0.7.

The stock price has been consolidating from the start of the year in a range but the financials are steadily improving.

The bank's ROA for the Q2FY25 was 1.3%, up 16 basis points (bps) YoY. The bank's GNPA ratio improved by 82 bps to 2.5%, while the net NPA ratio was 0.6%.

The bank's net profit has grown at a 5-year CAGR of 77%. The 5 year sales CAGR is 17%.

Here's how the stock price has performed in the past 1 year.

The outlook is also pretty steady. The management is focusing on improving fee-based income and they expect to maintain an ROA above 1%.

The management has guided for deposit growth of 9-11% and advance growth of 11-13% for FY25. This is a slight reduction from previous guidance due to the challenging deposit market.

The management also expects to maintain a net interest margin (NIM) of 3.15% +/- 5 bps.

Overall, Bank of Baroda is a well-capitalised bank with a strong financial performance and a stable outlook. The bank is focused on growing its retail business and improving its digital capabilities.

For more information, check out Bank of Baroda's financial factsheet.

Snapshot Of Top Undervalued PSU Stocks from Equitymaster's Stock Screener

Here's a quick view at the above-mentioned companies based on some crucial financial parameters.

Conclusion

The stocks mentioned above score well on traditional value metrics but, it's crucial to conduct thorough research, assessing financial performance.

Understanding the long-term business prospects are vital steps before investing.

PSU stocks are heavily reliant on government policies and its priorities change with time.

The upper management is also not steady with bureaucrats and technocrats rotating between different PSUs.

Past returns of PSUs were a mix of rerating due to decadal ignorance of the sector. The recent operational level improvement in the companies is seen only due to renewed focus on PSUs by the government to make them ready for privatisation and bridge the fiscal deficits with increased profits and thereby dividends.

The initial rerating is largely behind us and the stocks from hereon will follow earnings growth.

Not every undervalued stock will recover or perform as expected; some may remain underpriced due to genuine weaknesses.

Thorough research is essential to distinguish truly undervalued companies from those with poor fundamentals and the ones that fall behind on corporate governance.

Your every investment decision should align with your financial goals and risk tolerance.

Happy investing.

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