State-Run Firms Seen Extending Dream Rally On Modi Bets

(Bloomberg) --

India's state-owned stocks are all the rage and some investors say the rally isn't over as Prime Minister Narendra Modi's expected re-election next year is seen supporting capital expenditure, further boosting their allure. 

Modi's government is spending billions of dollars on everything from roads and railways to defense, renewing interest in a sector that has for long been a straggler of India's $4 trillion stock market. 

The S&P BSE PSU Index, a gauge that includes some of the nation's largest power utilities, miners, oil refiners and engineering firms, has surged 44% thus far in 2023. That's beaten the 14.5% advance in the S&P BSE Sensex Index by the most in two decades, data compiled by Bloomberg show. 

“There is still room for further gains” as valuations are still low compared to non-state players, said Anita Gandhi, strategist at Arihant Capital Markets Ltd. in Mumbai. “If the government comes back with a strong majority, they will have room to support these firms even more.” India's general election is due early next year.

Investors expect the conducive government policy to boost the low valuation — the PSU gauge trades at 10 times its 12-month forward earnings despite being set for its best year since 2009. That's half the valuation of companies in the Sensex, which rose to a fresh record this week after Modi's victories in state polls.

“These stocks have been ignored for a long time. In the meantime, they were building up their balance sheets and increasing capacity, all while staying profitable,” Arun Chulani, co-founder of First Water said in an interview. The India-focused fund is betting on companies that benefit from the government's infrastructure push.

State-run companies have been increasing their interaction with institutional investors in a bid to improve their valuation and market performance. The PSU gauge has trailed the Sensex in six of the past 10 years.   

“We have seen many top-level executives setting up meeting with investors and actively discussing prospects of their companies,” said Ramesh Mantri, chief investment officer at WhiteOak Capital AMC, which has $792 million in assets. 

Read more: Modi's Nation-Building Push Spurs $125 Billion Industrials Rally

Even Modi in his address to lawmakers in August offered light-hearted advice to the public to invest in state-run firms that were criticized by the opposition. The bet will surely yield good returns, he added in jest. 

For now, investors are betting on the government's efforts to build India. The latest budget has set aside a record 10 trillion rupees ($120 billion) to capital spending in the year ending in March 2024, more than double from three years ago. 

“Historically, these stocks have benefited the most from public capex,” Rajat Agarwal, Asia equity strategist at Societe Generale, said by phone. 

That also means a disruption in policy continuity can sour sentiment toward these stocks. But this fear is fading after the ruling Bharatiya Janata Party's victories in state polls over the weekend bolstered Modi's bid for a third term in office. 

The poll's result has reduced the risk of a populist turn and bodes well for continued government capex, according to Nuvama Wealth. 

“The ruling party's strong performance provides it political capital to pursue the infrastructure push,” analysts led by Kapil Gupta wrote in a recent note.

--With assistance from Anup Roy and Shinjini Datta.

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