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One of the burning questions on the minds of Indian investors over the past two years has been: How long will this fairytale run in PSU stocks last?
So far, there’s no clear answer as the rally shows no signs of slowing down.
And With the Budget around the corner, expectations are high that the government will maintain its strong focus on key sectors such as infrastructure, railways, and defense—areas predominantly occupied by public sector undertakings. This could potentially extend the ongoing rally even further.
Over the past year, India’s listed PSUs have seen their market capitalization soar from $404 billion to $804 billion. The BSE PSU Index has been a top performer, delivering over 100% returns.
And get this—the 56 stocks in the BSE PSU Index have skyrocketed, with gains ranging from an eye-popping 703% to 27%.
Even the "worst" performer, Bank of Baroda, which jumped 27%, has outperformed the benchmark Sensex, which is up just over 21%. That’s how intense this PSU rally has been.
So, what’s fueling this surge? Is it all just market hype, or are we witnessing a fundamental transformation for PSUs, once known for their sluggishness?
The real game-changer here has been the government’s aggressive push on infrastructure and capital expenditure.
The government’s focus on revitalizing India’s infrastructure, and the concomitant increase in capital expenditure, have been the principal drivers for the change in fortunes of public sector enterprises.
The Centre’s budgeted capex, dedicated to long-term assets like roads, ports, machinery, and energy infrastructure, has skyrocketed from ₹1.9 trillion in 2013-14 to an incredible ₹11.1 trillion for 2024-25. That’s more than a fivefold increase.
Meanwhile, PSUs have also ramped up their spending, with capex climbing from ₹2.6 trillion in 2013-14 to ₹3.4 trillion in 2024-25.
Initiatives like ‘Make in India’ have further fueled this momentum, boosting local manufacturing and reducing dependency on imports.
This substantial boost in total capex, along with supportive government policies, is expected to drive job creation, attract private investments, and steer India toward its goal of becoming a $5 trillion economy.
So one thing is clear, there is a reason for this rally.
But that brings us to our next question -- have the structural changes brought about by the Modi govt and the future growth potential already priced in? In other words, are PSU stocks overvalued or undervalued?
Analysts suggest that many PSUs may not just be overvalued but could be nearing bubble territory.
For instance, the best PSU performer Cochin Shipyard is currently trading at a price-to-earnings multiple of 85.6 compared to its 10-year average of 18.4.
Even PSU banks, traditionally valued conservatively, now average a price-to-book ratio of 1.5, up from their historical sub-1 levels.
In case of Indian Overseas Bank, the current multiple is at 4.71, higher than that of ICICI Bank's 4.07, the most expensive private sector bank.
But interestingly if you have spent a meaningful time in the annals of the stock market you would know that during bull markets, high-flying stocks tend to soar even higher, often defying expectations and logic.
Simply put, while following short-term trends or momentum can pay off, long-term success hinges on focusing on solid fundamentals and sustainable growth.
So, investors should ask themselves: Are they in it for quick gains or committed to the long haul?
For those looking long-term, experts caution that sky-high valuations should be approached with caution. For short-term players, enjoy the ride while it lasts.
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