Here is why public sector companies are now darlings of the Street

Mumbai: The shares of public sector companies have been among the best outperformers in the large cap space for some time now. The BSE PSU Index has given a return of 23.5% in the past year against the 9% return of the benchmark Sensex and 11.3% of the BSE100. But what is driving the PSU theme?

HIGH DIVIDEND, LOW VALUATIONS

Even after the recent rally, many PSU stocks are trading at high dividend yields. Stocks such as Coal India, PFC and REC offer 6-9% dividend yields at their respective current market prices.The government has mandated oil-related companies to give out 30% of their profit as dividend.Almost all PSU stocks, except a few public sector banks, are dividend paying. In terms of valuations, PSU stocks such as NTPC, NMDC, NALCO, Oil India, ONGC, PFC, REC, NHPC and SJVN are trading at book value of less than 2, which is low in terms of valuations.

CAPEX AND STRONG ORDER BOOKS

The volatility in commodity prices has not deterred public sector companies from capital expenditure (capex). ONGC has bucked the global trend in capex among oil companies and will make capital expenditure of , a ro u n d ` 3 0 , 0 0 0 crore in FY17. Oil marketing compad nies (OMCs) have in all committed over `1 lakh crore of capex over the next few years. Power generator NTPC has raised its capex target by 18% year-onyear to `30,000 crore in FY17.Powergrid's FY17 capex target is `23,000 crore, marginally higher than the previous fiscal. Some government-run companies such as Engineers India, BEL and BEML are seeing strong order book growth, thanks to the rise in government spending. These factors are providing higher visibility on the future earnings of public companies versus their private peers.

RISING INVESTOR CONFIDENCE

Despite 100% rise in crude oil prices and fiscal pressures, the government has not asked OMCs -Hindustan Petroleum Corp, Indian Oil and Bharat Petroleum Corp -to share the burden and has given them complete pricing freedom. The recent price hike by Coal India also supports this argument. Strong returns by the OMCs -250% to 500% -in the past three years have made investors realise the potential value in PSU stocks.

IMPROVING GOVERNANCE

There is a common belief among investors that governance in public companies has improved significantly. PSUs have become more transparent and accessible and friendly to investors. Measures taken by the government, such as bringing in more independent directors, has helped improve governance at PSUs.Divestments The government has been able to divest its stakes in public sector companies worth only `21,432 crore till date in FY17 against the target of `56,000 crore. To meet the target, the government will have to ensure strong performance of PSUs.Analysts say that getting strategic investors could lead to reconfiguration of the businesses and strong value unlocking.