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New bull market on the horizon in PSUs...

ICICIdirect Research 13 Sep 2022 DISCLAIMER

What's Buzzing

The PSU sector is buzzing on the back of potential disinvestment across banking, fertiliser, metal, etc, along with reforms in sectors like defence, power and logistics.

Context

The BSE PSU index has remained in a consolidation phase for the past 14 years, post its 2003-07 rally and is now breaking out from this multi-year consolidation phase.

What has changed this time is that the breakout in the index is backed by multi sector participation as apart from PSU banks, companies from energy, defence, fertiliser, are turning around with multi-year breakouts.

Historically, breakouts post multiyear underperformance and resultant under ownership in such sectors, lays the foundations of a structural bull market that lasts for several quarters or years and generates multi-fold returns for investors. Noteworthy example is that of the technology sector, wherein breakout from 2000-2009 consolidation paved the way for a structural bull market wherein the index doubled over the next few years and quality companies from the sector with respectable fundamentals outperformed the benchmarks. More recently, the capital goods sector has given a similar decade long breakout from the 2007-20 consolidation phase and already outperformed over the past one year wherein some companies have given outsized returns even when benchmarks underwent consolidation phase. 

Our perspective:

The BSE PSU index has just registered a breakout from the 14 year consolidation phase. It is on the cusp of a structural bull market backed by strong breadth. Post such breakouts, temporary phases of consolidation cannot be ruled out. Such phases would offer incremental buying opportunity and should not be construed as negative. We expect the sector to outperform in coming years wherein companies like State Bank of India, Bank of Baroda, Concor, Bharat Electronics, Hindustan Aeronautics, Cochin Shipyard, Garden Reach Shipbuilders, RCF, Coal India, NTPC, NHPC, SJVN, Shipping Corporation of India, are poised to accelerate and generate sizeable returns.

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