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Best PSU Stocks to Buy in India

Author Nirali | Posted July 5, 2021

Last Updated – July 2021

Best PSU Stocks to Buy in India
Best PSU Stocks to Buy in India

 In this article, we will cover,

– What are public sector undertakings
– A comprehensive list of the best PSU stocks to buy
– A model portfolio requiring an estimated amount to gain exposure to the best PSU stocks to buy
– Portfolio Companies
– Detailed overview of the Best PSU stocks to buy now in India
– A table consisting of the evaluation of best PSU bank stocks to buy now based on multiple parameters

What are Public Sector Undertakings?

PSUs or public sector undertakings are closely linked to the core sectors of the economy and have been successfully able to build a strong industrial base in the country. These undertakings are majority owned by the Government of India. The core sectors of the economy play a crucial role in the nation building process, which sets the tone of the economy in the right direction. These core sectors are namely finance, coal, capital goods, infrastructure, oil, power, metal and mining.

The current total market-cap of the PSU companies is more than Rs 10 lakh crore. PSUs contribute a good amount of monies regularly to the government in the form of dividend, excise duty, custom duty and corporate taxes.

Union Finance Minister Nirmala Sitharaman has announced major reforms for Public Sector Undertakings (PSU), as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms.  The government is likely to announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility. This is a welcome move as it will open up certain markets to more private competition and consolidates the sprawling network of numerous PSUs. However, these bold announcements would unlock a lot of value only if they are transmitted quickly into action.

Summary Table for Best PSU Stocks to Buy now in India

Sr. No. Company Name BSE Scrip Code NSE Symbol CMP (as on June 28, 2021) Rating Industry
1 Oil & Natural Gas Corporation Ltd. 500312 ONGC 121.0 0.5 Oil Exploration
2 Bharat Petroleum Corporation Ltd. 500547 BPCL 470.0 0.5 Refineries
3 Indian Oil Corporation Ltd. 530965 IOC 111.0 0.5 Refineries
4 GAIL (India) Ltd. 532155 GAIL 153.0 0.5 Industrial Gases & Fuels
5 Bharat Heavy Electricals Ltd. 500103 BHEL 65.2 0.5 Engineering – Industrial Equipments
6 Steel Authority Of India Ltd. 500113 SAIL 131.8 0.5 Steel & Iron Products
7 Coal India Ltd. 533278 COALINDIA 149.0 2.0 Mining & Minerals
8 NTPC Ltd. 532555 NTPC 116.0 0.5 Power Generation/ Distribution
9 Power Grid Corporation Of India Ltd. 532898 POWERGRID 231.0 0.5 Power Generation/ Distribution
10 Container Corporation Of India Ltd. 531344 CONCOR 699.0 3.0 Logistics
11 NMDC Ltd. 526371 NMDC 178.0 1.0 Mining & Minerals
12 Cochin Shipyard Ltd. 540678 COCHINSHIP 403.0 1.0 Ship Building
13 National Aluminium Company Ltd. 532234 NATIONALUM 73.4 0.5 Aluminium & Aluminium Products
14 State Bank of India 500112 SBIN 429 0.5 Bank – Public
15 Punjab National Bank 532461 PNB 42.3 0.5 Bank – Public
16 Bank of Baroda 532134 BANKBARODA 83.5 0.5 Bank – Public
17 Union Bank of India 532477 UNIONBANK 39.4 0.5 Bank – Public
18 Indian Overseas Bank 532388 IOB 24.8 0.5 Bank – Public

PSUs or public sector undertakings are closely linked to the core sectors of the economy and have been successfully able to build a strong industrial base in the country. These undertakings are majority owned by the Government of India. The core sectors of the economy play a crucial role in the nation building process, which sets the tone of the economy in the right direction. These core sectors are namely finance, coal, capital goods, infrastructure, oil, power, metal and mining.

The current total market-cap of the PSU companies is more than Rs. 10 lakh crore. PSUs contribute a good amount of money regularly to the government in the form of dividend, excise duty, custom duty and corporate taxes.

Union Finance Minister Nirmala Sitharaman has announced major reforms for Public Sector Undertakings (PSU), as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms.  The government is likely to announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility. This is a welcome move as it will open up certain markets to more private competition and consolidate the sprawling network of numerous PSUs. However, these bold announcements would unlock a lot of value only if they are transmitted quickly into action.  Currently, PSUs are witnessing a large rally as there are expectations of disinvestments by the Government in order to meet their target. Infact, a number of PSU lenders are looking to raise capital to maintain their asset quality. It would be interesting to see how this pans out and if the stock price sustains at these levels.  

PSUs majorly get impacted by any changes in government policies. How much stake the government intends to trim in the future has a close linkage to the government fiscal deficit which always remains an overhang on the stock prices. Any economic development and infrastructure growth in the country is coherently interlinked, as any economic development is not possible without the development of infrastructural facilities. 

In order to measure the performance of PSU it is imperative to have a close watch on indicators such as their share in GDP, capital formation, employment generation etc. 

As an investor, it is imperative to look at the industry outlook before picking up stocks. When there are expectations of a cyclical recovery in the economy, the PSUs are well placed to benefit. Factors such as free cash flow, return on capital and equity, competitive business advantage, scalability of business and valuation shall be the basis for making investments in these stocks.

Oil & Natural Gas Corporation (ONGC)

ONGC is India’s largest oil exploration and production company. The company currently operates across the globe and is also engaged in some downstream activities (i.e. engaged in refining, processing and marketing) of crude oil processing. ONGC produced 34.33 MMT of oil and 30.55 MMT of gas in FY19 and is vertically integrated with HPCL for downstream activities. Oil and gas reserves as of FY2019 stood at 1,853.23 MMTOE. ONGC generated revenues totaling to Rs. 96,000 Crs with net realization/bbl at Rs. 4154/bbl. 

ROE of the company stood at 7.10% for FY21 and this return ratio is impacted on account of the pressure on crude oil prices and the sharp drop witnessed in May 2020 and followed a lower demand in the earlier part of 2020. With the rise in oil prices witnessed in the earlier part of 2021, the company did see some gains pour in favor of the company. The reduction in crude oil prices had directly hit margins as well as sales which were seen down due to fall in demand. But post May oil rose at a rapid pace and by mid-December brent crude was trading over the $50/ barrel mark. This is extremely beneficial for a company like ONGC whose margins are directly proportional to the rise in crude prices. The company has been able to maintain low debt levels with the debt equity ratio at 0.50 times. The stock currently trades at a P/E of 9.65 times and EV/EBITDA of 4.50x which indicates the company is valued inexpensively. ONGC can also be looked at as a dividend play with dividend yield at 4.14%. The company faces high amounts of risk from fluctuation in crude oil prices and volatility which directly affects the profits of the company. Another factor to consider is the changes in regulations that can affect realisations.

Coal India 

Coal India possesses 48% of India’s proven reserves in its command area and accounts for bulk of the domestic coal production. India has abundant coal reserves and non-availability of other sustainable sources of fuel will enable coal to continue to play a dominant role in meeting India’s energy requirement. Coal India accounted for an estimated 85% of domestic coal production in FY2020. Out of total production by the company around 80% of its supplies were to the power sector. Offtake and profitability took a hit in H1FY21 with power demand being constrained due to countrywide lockdown to control the novel coronavirus.

Debt to equity ratio stands at 0.16 times and liquidity remains robust with net cash and cash equivalent of around Rs. 17,310 Crs as on March 31, 2021. Currently, the dividend yield stood at 8.40% which is one of the best amongst PSUs. Government shareholding is steady at 66.13% since last few quarters. Despite the company’s proposed capex, share buyback and large dividend payout, financial risk profile and liquidity is assumed to remain strong over the medium term, backed by robust capital structure, sizable liquid surplus and healthy cash accrual. The Government of India recently launched auctions for 41 coal mines for commercial mining by private sector players. Private players entering this business may take time to start production and keep Coal India’s near-monopoly status and strategic importance intact. Operational flexibility has improved in the past two years with environmental and forest clearances enabling faster implementation of stuck projects for coal evacuation. However, any change in the regulatory regime or socio-political factors may severely impact the business. 

GAIL (India) Ltd.

GAIL has presence in various products along with leadership position in transmission of natural gas and LPG. The company has been able to establish its presence in various other business segments like city gas distribution, petrochemicals, liquid hydrocarbons, exploration & production and telecom. These diversified business segments help in spreading operating risk of the company. Company continues to derive strength from its majority owner Government of India (51.80%). GAIL is the market leader in the transmission of natural gas in the country with over 12,400 km of pipeline network, out of total pipeline network in India of approx. 17,500 km (i.e. 70.86% of country’s pipeline) as on March 31, 2020 with a natural gas handling capacity of 253 MMSCMD.

During FY20, GAIL’s operating income moderated marginally by 1.92% to Rs. 76,201.45 Crs mainly on account of dip in income from petrochemicals (on account of dip in sales realisations) and LPG and other liquid hydrocarbons (both on account of dip in sales realisations and sales volume) segment. The company enjoys a comfortable capital structure with debt to equity ratio of 0.14 times as on March 31, 2021. Further, liquidity position remains strong with a total cash and bank balance of Rs. 2,025 Crs as on March 31, 2021. Its cash conversion cycle improved at 14.80 days in FY21 vs. 22 days in FY20. Petrochemicals, LPG and liquid hydrocarbons are directly exposed to changes in the commodity prices and with a change in crude oil and petroleum prices, the realizations from petrochemical will also vary. Company also carries the risk of reduction in shareholding of government below 51% and risk of higher than expected debt funded capital expenditure plans which may lead to pressure on capital structure.

NMDC Limited 

NMDC being India’s largest iron ore company is engaged in exploration and production of iron ore along with diamond, production and sale of sponge iron and generation along with sale of wind power. The company enjoys market share of about 17-18% domestically in iron ore (excluding captive iron ore production). It has access to reserves of high grade iron ore, predominantly greater than 63-65% iron ore. The current reserve and resources stand at approx. 2.7bn tonnes, with Chhattisgarh resources standing at approx. 2.3bn tonnes and Karnataka reserves at approx. 0.4bn tonnes.

All the mining licences of NMDC are valid providing significant advantage in the highly regulated mining industry where private miners can suffer stoppage of operations due to lack of a valid licence or clearance or having to pay a premium. NMDC is 68.30% owned by the government and is a Navaratna under the administrative control of the Ministry of Steel. Company has been able to maintain a high cash balance with an amount of Rs. 5,862 Crs which is seen declining over years due to high capex being undertaken and on account of healthy dividend payouts (dividend yield at 4.37%). Any significant high outflow by way of dividends or otherwise can lead to a reduction in free cash availability which may negatively impact the performance going ahead. Furthermore, regulatory intervention leading to the non-renewal of mining lease or loss of the PSU status would remain key risks for the company.

State Bank of India (SBI)

SBI is a bank of systemic importance (market share of approx. 20% in advances and 23% in deposits in the Indian banking system) and has a dominant position in the Indian banking sector; it being the largest bank in terms of business and asset size. The bank operates as a strong and established franchise through an extensive PAN India branch network and international presence. Bank’s major shareholder is the Government of India which holds 57.60% stake in the bank as on March 31, 2021. SBI group’s large and diversified deposit base lends stability to its strong resource profile, which is backed by a healthy proportion of low-cost current account and savings account (CASA) deposits.

It has maintained a high level of low-cost CASA deposits, at above 40%, over the past few years and now stands at 46.13% as on March 31, 2021. Currently, SBI has adequate capitalisation, indicated by overall capital adequacy ratio (CAR; under Basel III) of 13.74% as on March 31, 2021. Lender also has the flexibility to raise additional capital through stake sale in its subsidiaries. Over the last 2 years, the bank has seen recoveries from its NPAs under the NCLT which has aided its asset quality parameters to improve. The key risks include reduction in government support and ownership below 50%, deterioration in asset quality parameters over Net NPA ratio of over 10% and slump in profits on a continuous basis leading to deterioration in capitalization levels.

Investors should be clear that when it comes to investing in PSUs, one cannot follow the ‘Buy and Forget’ strategy as PSUs get impacted majorly by any changes in government policies. Any PSU’s future will depend on the government’s ever bulging fiscal deficit and their disinvestment plans. With COVID-19, investors should certainly look at bets in safe sectors to protect their capital. PSUs are considered safe bets because their dividend payouts are lucrative. Recently, the government has laid out a public sector policy that would aid higher efficiency in PSUs through an increase in private sector participation and privatization. While this is positive for long term growth prospects of PSUs, they could underperform in the near term due to overall economic slowdown. Investors should surely allocate some percentage of their portfolio towards PSUs since they are under the Government’s umbrella so there is a higher going concern guarantee and they are also the key to the growth of our economy.

Watch our video on how to analyse and pick PSU stocks for investments

Model Portfolio

In order to get an exposure to best PSU stocks, you would need a total of Rs. 16,714.0 for the below curated portfolio as of June 28, 2021. 

Company Name 

Weightage CMP (as on June 28, 2021) Quantity Total (Rs.)
Oil & Natural Gas Corporation Ltd. 18% 121 25 3,025.00
Coal India Ltd. 21% 149 24 3,576.00
GAIL (India) Ltd. 14% 153 15 2,295.00
NMDC Ltd. 16% 178 15 2,670.00
State Bank of India 31% 429 12 5,148.00
  100% Total  16,714.00

Detailed overview of the Best PSU stocks to buy now in India

The table below covers some of the most important factors while evaluating Best PSU stocks such as the return ratios – RoE, operating margins, sales and earnings growth, market cap, etc.

Sr. No.Company NameBSE Scrip CodeNSE SymbolCMP (as on June 28, 2021)RatingIndustryMarket Cap (in Crs)% By Government March 31, 2021)Compounded Sales Growth (5 years)Compounded Profit Growth (5 years)Operating Profit Margin (%)Price to Earnings (times)Price to Book (times)Debt to equity (times)Dividend Yield (%)Return on Equity (%)Return on Capital Employed (%)
1Oil & Natural Gas Corporation Ltd.500312ONGC1210.5Oil Exploration152,096.0060.40%24.00%-2.00%13.70%9.650.690.564.14%7.37%10.10%
2Bharat Petroleum Corporation Ltd.500547BPCL4700.5Refineries101,966.0053.00%4.00%9.00%9.11%8.241.90.894.47%27.30%18.60%
3Indian Oil Corporation Ltd.530965IOC1110.5Refineries104,874.0051.50%1.00%14.00%11.50%4.850.940.979.43%20.90%15.40%
4GAIL (India) Ltd.532155GAIL1530.5Industrial Gases & Fuels67,982.0051.80%2.00%27.00%12.60%11.11.280.144.18%12.00%13.50%
5Bharat Heavy Electricals Ltd.500103BHEL65.20.5Engineering – Industrial Equipments22,703.0063.20%-7.00%N.A.-18.20%00.870.190.00%-9.87%-9.96%
6Steel Authority Of India Ltd.500113SAIL1310.5Steel & Iron Products54,254.0065.00%12.00%25.00%18.40%13.21.190.780.76%9.47%11.30%
7Coal India Ltd.533278COALINDIA1492Mining & Minerals91,671.0066.10%-3.00%-2.00%20.60%7.222.510.168.40%37.00%46.10%
8NTPC Ltd.532555NTPC1160.5Power Generation/ Distribution112,530.0051.10%9.00%8.00%30.50%7.090.891.572.71%13.00%8.76%
9Power Grid Corporation Of India Ltd.532898POWERGRID2310.5Power Generation/ Distribution120,771.0051.30%14.00%17.00%88.30%9.391.731.874.33%19.10%11.90%
10Container Corporation Of India Ltd.531344CONCOR6993Logistics42,581.0054.80%0.00%-12.00%16.30%84.34.180.010.52%4.99%7.50%
11NMDC Ltd.526371NMDC1781Mining & Minerals52,092.0068.30%19.00%20.00%57.20%8.31.740.054.37%21.80%29.90%
12Cochin Shipyard Ltd.540678COCHINSHIP4031Ship Buiding5,303.0072.90%7.00%16.00%25.60%8.691.330.034.13%15.80%21.60%
13National Aluminium Company Ltd.532234NATIONALUM73.40.5Aluminium & Aluminium Products13,490.0051.30%3.00%-35.00%12.90%29.11.3303.40%1.33%2.23%

Banking PSU Stocks

Sr. No.Company NameBSE Scrip CodeNSE SymbolCMP (as on June 28, 2021)RatingIndustryMarket Cap (in Crs)% By Government March 31, 2021)Price to Book (times)Return on Equity (%)Return on Assets (%)Net Interest Margin (%)GNPA%NNPA%CASA Ratio (%)NII Growth YoYPAT Growth YoYCRARDeposits Growth YoY (%)Advances Growth YoY (%)Provision Coverage Ratio (%)Cost to income ratio (%)
1State Bank of India500112SBIN4290.5Bank – Public382,687.057.60%1.398.21%0.51%3.26%4.98%1.50%46.13%32%60%13.74%13.47%5.32%87.75%53.60%
2Punjab National Bank532461PNB42.30.5Bank – Public46,577.073.20%0.734.01%0.32%2.83%14.12%5.73%45.50%46%NA14.64%56.81%42.46%80.14%47.24%
3Bank of Baroda532134BANKBARODA83.50.5Bank – Public43,181.064.00%0.521.63%0.11%2.72%8.87%3.09%42.87%10%N.A.15.74%2.33%2.36%81.80%47.59%
4Union Bank of India532477UNIONBANK39.40.5Bank – Public26,963.083.50%0.88.45%0.52%2.89%13.74%4.62%36.33%89%N.A.12.52%104.59%86.77%81.27%46.54%
5Indian Overseas Bank532388IOB24.80.5Bank – Public46,878.096.40%2.905.15%0.32%2.22%11.69%3.58%42.52%-8%143%15.32%7.78%5.26%90.34%49.58%

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