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The PSU Gold Rush: Will these Stocks Continue to Shine in 2024?

Dec 11, 2023

The PSU Gold Rush: Will these Stocks Continue to Shine in 2024?

I often used to marvel at the stock-picking ability of super investors.

I used to think that they possess this extraordinary skill of betting on the right stock out of the thousands of stocks out there and ride it to the very top.

However, slowly, and steadily I realised this wasn't the case.

A lot of them don't excel at choosing the winners. Instead, their expertise lies in avoiding the big losers.

All they do is identify stocks with the risk-reward equation in their favour and then leave the markets to do the rest.

They stay away from toxic stocks i.e. stocks with poor fundamentals or egregious valuations or both.

They position themselves to make the most out of the coming stock market rally.

A great example of this is Ben Graham's testimony on the stock market before the Committee on Banking and Currency back in 1955.

Ben Graham was asked by the Chairman of the Committee how he knew that a stock he bought at 10 will eventually go up and reach what Graham thinks to be its fair value of 30.

How this move from 10 to 30 happens is what the Chairman wanted to know.

Graham's answer taught me a very deep lesson when I first came across it.

Graham opined that this was one of the mysteries of the investment business. It is a mystery to him as well as to everybody else.

He further opined that he knows from experience that eventually, the market catches up with value. It realises it in one way or the other.

Graham's replies gave me a fresh perspective with which to look at stocks. Find the next stock market winner or the next big multibagger is not the only road to riches.

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Focusing more on buying hated stocks where the margin of safety is big and where the business quality is decent, if not the best, is also a good way to earn market beating long term returns.

But what makes me confident that these hated stocks will eventually become popular and end up giving good returns?

Well, as Graham said, how the price catches up with value is a mystery of this business. But given how stock market has worked in the past, the price does catch up with value more often than not.

Who would know this better than investors who invested in PSU stocks a year or two ago.

I clearly remember that a lot of investors, even the most successful ones, didn't want to come anywhere close to PSU stocks. The fact that these were decent businesses and were available at extremely attractive valuations, didn't register with them.

They kept waiting for some catalyst to take the price higher. And even if the catalysts did come in the form of huge government spending on defence and infrastructure, which boosted the profits of these stocks, old biases were hard to shake off. A lot of the investors still stayed on the sidelines.

On the other hand, taking a simpler approach of buying good quality undervalued stocks at extremely attractive valuation and then waiting for 2-3 years for the price to catch up with value, would have yielded handsome results.

A portfolio of the most undervalued stocks in India with decent management and strong balance sheets would have led you to a lot of PSU stocks and investing in them would have worked like magic.

For perspective, the S&P BSE PSU index, has given an impressive 44% returns this year. This is 3x as high as the returns earned by the Sensex.

Of course, individual stocks have done even better, with some of them earning multibagger returns in a matter of 1-2 years.

So, PSU stocks have given fantastic returns and a lot of investors have missed this bus. But what next? Can these investors still come aboard?

Can these PSU multibaggers continue their good run well into 2024? Or is it too late now and the risk reward is no longer in favour of the investors?

Make: Your Investing Stress-free with Value for Money Stocks

Well, I did some research and the findings are not very encouraging. Out of 64 PSU stocks that I have data for going back many years (excluding PSU banks), nearly 8 out of 10 PSU stocks are trading above, and only 2 are trading below, their historical valuations.

Further, only 1 out of 10 PSU stocks is trading at least 25% lower than its historical valuation.

In fact, here are the top 10 stocks that are trading at the biggest premium to their 10-year average price to book value multiple.

Company Name Premium to 10 yr avg. PBV
The Fertilisers And Chemicals Travancore Ltd. 987.7%
Rail Vikas Nigam Ltd. 207.4%
Ircon International Ltd. 187.5%
Mazagon Dock Shipbuilders Ltd. 177.9%
IFCI Ltd. 173.1%
Gujarat Mineral Development Corporation Ltd. 170.1%
SJVN Ltd. 133.3%
Cochin Shipyard Ltd. 132.9%
Hindustan Aeronautics Ltd. 131.0%
Bharat Heavy Electricals Ltd. 127.5%
Source: ACE Equity, Equitymaster

The first one i.e. The Fertilisers And Chemicals Travancore Ltd (FACT), is a bit of an outlier, trading at 11x the multiple it has traded in the past.

Now, the reason I took price to book value and not price to earnings as a valuation indicator is because I found it more reliable than the PE ratio as earnings were quite volatile for some of the companies.

After FACT, you have rail, defense, mining, and power stocks that are also way higher than their long term PBV multiples. Clearly, the sentiments around these stocks have changed and changed big time.

Now, here's the list of 10 stocks that are most undervalued i.e. trading lower than their historical PBV ratios.

Company Name Discount to 10 yr PBV
MMTC Ltd. -88.2%
Repco Home Finance Ltd. -58.6%
LIC Housing Finance Ltd. -46.6%
Petronet LNG Ltd. -39.5%
Bharat Petroleum Corporation Ltd. -37.6%
Life Insurance Corporation of India -32.5%
Gujarat Gas Ltd. -26.6%
Gujarat State Petronet Ltd. -25.1%
Coal India Ltd. -24.5%
Hindustan Petroleum Corporation Ltd. -20.7%
Source: ACE Equity, Equitymaster

There are some stocks here where the risk reward still looks attractive and then there are others like MMTC, where the historical performance doesn't inspire a lot of confidence and where valuing the stock doesn't look like an easy job.

So, what's the final verdict? Well, while I can't give you explicit buy and sell recommendations here, I can certainly try and guide you in the right direction.

You see, stocks ask different questions at different valuations.

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When PSU stocks were trading extremely cheap, all you had to ask was whether these businesses will survive and whether they will continue to grow at the same rate as in the past if not faster?

If your answers to both these questions were yes then all you had to do was invest and wait for the market to realise the true value of these stocks.

At current valuations though, there is an entirely different set of questions that you need to ask if you want to make money from these stocks.

These questions would be:

Can the government continue with its huge capex plans? Do these stocks have the balance sheet and the management bandwidth to grow at a much faster rate in the future? Will the market continue to award premium valuations to these stock?

If you think you will need to do quite a bit of research and understand these stock more deeply to answer these questions, then you can hold on to the ones trading at premium valuations and do your research.

But if you believe finding reliable answers to these questions is beyond you, then perhaps it is a good time to exit them.

All in all, you need to be honest and figure out which of these buckets you fall into. There are some PSU stocks, especially among the ones that are trading a discount to their long-term valuations, where the first set of questions might suffice.

And then there is the second group of stocks trading at expensive valuations where you may need to answer the second set of questions.

For investors whose style is similar to mine, they might exit quite a few of the stocks from the first table above and keep looking for stocks to invest in 2024 from the second table.

And you may not necessarily copy me. Your decision will depend on the approach you want to take. So, think carefully and only then take an appropriate call.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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1 Responses to "The PSU Gold Rush: Will these Stocks Continue to Shine in 2024?"

Manoj hansaria

Dec 13, 2023

Hi.
Really very good discussion and research but it's too late to put up in public domain. The price of the shares has been 5x

I request for the benefit of investor
Please try to put up in public domain
At the beginning

Like 
  
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