Best PSU Stocks to Buy in India – 2024

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

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.

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Summary Table for Best PSU Stocks to Buy now in India

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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 majorly 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. 20 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 downstream activities (i.e. engaged in refining, processing and marketing) of crude oil processing as well. ONGC has a unique distinction of being a company with in-house service capabilities in all areas of Exploration and Production of oil & gas and related oil-field services. It produced 21.49 MMT of crude oil and 21.35 MMT of natural gas in FY23. It is also vertically integrated with HPCL for downstream activities.

The ROE of the company stood at 14.1% for FY23. The ongoing Russia-Ukraine conflict with the OPEC’s cuts on oil production has added pressure and uncertainty to an already tight natural gas market. Europe’s natural gas supply has been a topic of concern since mid-2021. Short-term prices have reached all-time record highs since the beginning of the conflict. With the rise in oil prices and natural gas, ONGC has seen some gains pour in favor in the form of improvement in revenue. This is extremely beneficial for a company like ONGC whose margins are directly proportional to the rise in crude prices. Moreover, ONGC remains the key beneficiary of any upward revision in domestic gas prices. The company has been able to maintain low debt levels with the debt equity ratio at 0.51 times as of FY23. The stock currently trades at a P/E of 5.87 times and a Price to Book Ratio of 0.84 times. 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 

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 and 75% of total coal-based generation in FY2023. CIL contributes to around 50% of total power generation and meets approximately 40% of the primary commercial energy requirements of the country.

CIL has prepared a roadmap wherein it has envisioned 1 Billion Tonne production in the year 2024-25 to meet the coal demand of the country. Its Debt-to-equity ratio stands at 0.08 times and liquidity remains robust with net cash and cash equivalent of around Rs. 29,939 Crs as on March 31, 2023. Currently, the dividend yield stood at 7.86% which is one of the best amongst PSUs. The Government shareholding remains at 63.13%. Despite the company's proposed capex 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 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. Its 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. 

Hindustan Aeronautics Ltd.

Hindustan Aeronautics Ltd (HAL), a defence public sector undertaking (DPSU), was established on October 1, 1964. HAL undertakes design, development, manufacturing, maintenance, repair, overhaul, and servicing of products like aircraft, helicopters, engines and other related systems like avionics, instruments, and accessories. It also engages with the Indian Space Research Organisation (ISRO) to contribute to the space programmes of the country. The Government of India (GOI) remains HAL's largest shareholder, with a current shareholding of 71.64%.

Hindustan Aeronautics Limited’s (HAL) order book stand at a record Rs. 82,000 crore as on March 31, 2023, providing high revenue visibility in the medium to long term, The GoI’s increased focus on indigenisation with the Make in India policy along with the mandatory offset policy for defence procurement by GoI, augurs well for HAL. HAL does not have any debt on its books, remaining financially liquid company. The ROE and ROCE of HAL stand at 27.2% and 30.6% respectively.

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. NMDC is considered to be one of the low-cost producers of iron ore in the world. It also operates the only mechanized diamond mine in India at Panna, MP. 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. Its current reserves and resources stand at approx. 2.7 bn tonnes, with Chhattisgarh resources standing at approx. 2.3bn tonnes and Karnataka reserves at approx. 0.4bn tonnes. The company is also setting up a 3 MT integrated steel plant at Nagarnar, Chhattisgarh.

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 license or clearance or having to pay a premium. NMDC is 60.79% 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. 7098 crores with a good dividend yield at 4.13%. 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 and maintains a dominant position in the Indian banking sector. It is 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. The bank’s major shareholder is the Government of India which holds 57.49%, 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. The PSU 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 2% 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. Investors should also 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. 17,722.75 for the below curated portfolio as of  28th, Feb 2024.

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.

Banking PSU Stocks.  

Other links you may find useful:

• Our Collection of Best Stocks to Buy

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