10 PSU stocks worth buying

Known for stable returns, near debt-free status and dividend track record, these 10 PSU stocks are worth buying now, says Hamsini Karthik.
Illustration: Uttam Ghosh/Rediff.com

At a time when stock picking becomes increasingly challenging given the elevated valuations, stocks of State-owned entities offer a fall-back option for investors, thanks to reasonable prices versus their private peers.

While Power Grid and NTPC remain favourite public sector undertakings (PSUs), the Oil and Natural Gas Corporation (ONGC), GAIL, Indian Oil Corporation (IOC), Bharat Heavy Electricals (BHEL), Power Finance Corporation (PFC) and Bharat Earth Movers (BEML) are worth sampling.

PSUs offer a near debt-free balance sheet, growth visibility and a steady dividend track record. Here are 10 stocks investors can look at.

BEML

It plans to increase revenues by 65 per cent in FY18 to Rs 5,000 crore.

With a presence in mining, construction, defence and railways, all of which are seeing a spurt in orders and execution, the new management at BEML seems to be on track to achieve this target.

The government's focus on infrastructure building means strong long-term growth visibility.

Bharat Electronics

With an order book of over Rs 34,000 crore, earnings are well secure.

As execution also becomes more predictable and the product mix is improving, operating profit margins are going up.

This trend is seen as sustainable.

However, given the recent run-up in stock prices, a correction will be a good entry point for investors.

BHEL

A revival in slow moving orders and replacement demand from power generators will boost earnings in the medium term.

Low base effect will also accelerate growth from FY18.

Productivity, which started improving since June 2016, may gather pace as capacity utilisation rises.

While it may take time for long-term visibility to improve, given the slowdown in new thermal power projects, the industrial equipment and renewables segment should help.

The recent rally suggests investors could consider it on dips.

Engineers India

Benefitting from a revival in the capacity expansion of oil-marketing companies, analysts at Phillip Capital expect revenues to grow 40 to 42 per cent in FY18-19.

Consultancy services and turnkey projects provided to domestic and international clients will also help the company achieve this growth.

The current order book of Rs 7,600 crore provides five years earnings visibility.

GAIL

A ramp-up in polymer production, favourable pricing of liquefied natural gas (LNG) procured from the US and a buoyant outlook on gas sales as well as transmission, given the increase production by ONGC, add up positively for GAIL.

Positive on US LNG pricing has already prompted analysts at Kotak Institutional Research to increase the target price by 10 per cent to Rs 519.

IOC

Reckoned as better among the oil-marketing companies, full utilisation at its new Paradip refinery from FY18 will boost refining margins.

Analysts at Edelweiss expect Indian Oil to clock strong profit growth of 31 per cent from FY16-19.

A Rs 180,000 crore investment over the next seven years also secures long-term revenues.

The sharp fall in its debt-equity ratio by half to 0.6 times in FY16 over FY14 is also comforting.

NBCC

In the construction sector where orders are tough to come by, NBCC's order backlog stands at Rs 75,000 crore, thanks to its monopoly status in government's urban infrastructure.

Analysts at Reliance Securities feel it should help the firm grow its revenues by 25 per cent and 44 per cent in FY18 and FY19, respectively.

ONGC

After underperforming the market for many months, the stock is just beginning to catch up.

Analysts believe the share price does not factor in the gains from its KG basin hydrocarbon assets and its petrochemicals subsidiary, OPaL.

IDFC Securities, which has upgraded the stock to 'outperformer', expects the consolidated return on equity to increase to 18 per cent by FY19 once these gains show up starting FY18.

Firm crude oil and domestic gas prices should also help. A merger with an oil marketing company should improve its earnings profile.

PFC & REC

Allaying fears of lower loan growth and profitability, PFC and Rural Electrification Corporation (REC) have steered through FY17 so far convincingly.

Both are in the process of fortifying their loan book once again through demand from state electricity boards (SEBs).

The Ujwal Discom Assurance Yojana has come as a blessing in disguise, as the two financiers would have otherwise had to take some haircut on loans to SEBs.

Analysts at Edelweiss expect loan sanctioning in FY18 to rise by 10 per cent for both PSUs.