PSU stocks are a tempting proposition

Investors can still continue to party on stocks of public sector units! Despite everything, public sector undertaking stocks still retain the opportunity to create wealth.

Divestments in these stocks have already generated around Rs 9,400 crore (Rs 94 billion) for the government. And there are still more to come: two big oil PSUs are awaiting divestment.

Morgan Stanley in its latest strategy report has picked State Bank of Indiaand Mahanagar Telephone Nigam Ltd as their favorites.

With the bull market phase already upon us, the prognosis is that one of three stocks in the top 100 companies by market capitalisation will be state-owned.

Statistics indicate that around 30 PSU scrips have added Rs 1,17,500 crore (Rs 1,175 billion) to the market capitalisation in the last three years ever since the divestment wagon started rolling.

According to Morgan Stanley's equity research division, "state-owned company stocks have compounded at over 30 per cent in absolute terms and over 40 per cent relative to the market over this period."

SBI and MTNL pose better upsides for investors since their valuations are still low. While the SBI counter has seen a lot of activity with rumours regarding the hike in its foreign holding cap surfacing now and then, the MTNL scrip has remained rather remote from the rally which gripped the PSU shares.

A major reason for the superlative performance of PSU stocks in the marketplace is their dividend payouts. Dividends have grown faster than profits.

For instance, payouts of the top 15 companies have increased by 10 per cent to 33 per cent over the last three years.

So, though these companies have paid out 10 per cent less than the market as a whole, they now have a payout ratio 20 per cent higher than the market. Over the last 18 months, the dividend growth gap with the market has risen by almost 10 per cent.

In fact, banking and finance which currently has a weightage of 14 per cent in the National Stock Exchange's Nifty index is expected to be the new leader in the bull market, according to Enam Securities.

Among South Asian nations, the Indian banking sector has the lowest weightage in its index. The banking sector percentage weight in the index is 13.6 per cent as compared to Hong Kong's 38.6 per cent and Singapore's 29.9 per cent.