Indian public sector undertakings' profitability will continue to improve after "rebounding in style", according to Motilal Oswal Financial Services Ltd. The recovery in their contribution to earnings and market capitalisation will continue, it said.
State Bank of India, Coal India Ltd., Gail (India) Ltd. Hindustan Petroleum Corp. and Bank of Baroda Ltd. are among the brokerage's top picks.
Profitability of PSUs is likely to improve across domestic and global cyclicals, with PSU Banks driving the overall trend, the brokerage said in a June 19 note.
Earnings momentum is fueling the outperformance and the valuation premiums for PSUs are expected to sustain in the near term, Motilal Oswal said. "Strong business narratives and growing order book driving a rerating."
Higher commodity prices over the last two years have strengthened the profit and loss accounts and balance sheets of metals and oil and gas PSUs, it said.
The government's emphasis on localisation, increased capex, and ‘Make-in-India' in the defence sector has catalysed the improvement in the fortunes of industrial PSUs, it said. "Hence, we expect the recovery in PSUs' contribution to earnings and market capitalisation to continue."
Further, political stability with Modi 3.0 augurs well for the economy and continuity in policymaking will act like an "icing on the cake", the note said.
India is witnessing its own "mini-Goldilocks moment" with excellent macros, robust corporate earnings, focus on manufacturing, capex and infrastructure creation, according to the brokerage.
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