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Which PSU Stocks Should Investors Buy?

If PSU stocks continue to fall, these companies with a strong moat and compelling market share can become bargain picks

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It’s a cautionary tale of how no company should be managed, let alone one that employs over 170,000 people. For the first time ever, loss-making Bharat Sanchar Nigam (BSNL), along with MTNL, couldn’t pay salaries to its employees. In a last ditch effort, the government decided to merge the two ailing companies hoping to keep them afloat, maybe for a little while longer, as they play catch-up with private telecom players, including disruptor Reliance Jio. And if you thought this is where the woes of PSUs end, you’d be mighty wrong. It’s just the tip of the iceberg. After a tepid market debut last year, defence PSU HAL had to borrow Rs.10 billion in January to pay its employees, one-third of whom went on an indefinite strike over wage revision in October. Then, we all know the tale of our humble Maharaja, Air India, which isn’t even attracting private buyers and its survival continues to hang in balance. “Excessive dividends and huge mismanagement have resulted in a situation where investors are not willing to re-rate the stocks and businesses are deteriorating on fundamental parameters,” says Pankaj Bobade, head of fundamental research, Axis Securities.

Pankaj Bobade Head-research, Axis SecuritiesOnce touted as the crown jewels and a relic of India’s socialist past, the fall of PSUs has been stark. Their bottom lines also don’t make for a pretty picture. Bobade states, “They have been growing at a meagre 2% CAGR over FY12-18.” Naturally, weak performance over the years has depressed their valuation. Currently, SBI is the only PSU among the top ten companies in market capitalisation. BSE PSU Index has also been a laggard, giving 4.78% CAGR return since 2014 as compared to Sensex’s 14%. This year alone, 61 PSUs have lost an average of 22% of their market cap, with five companies losing more than half their share value.

Clearly, PSUs are saddled with structural flaws that are likely to be never rectified. Hence, the growing clamour for privatisation among India Inc veterans. But take a step back and think about what comes to mind when someone says heal

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