Usually, when we hear of PSUs, we believe that these companies are inefficient and lag in quality standards. The fear of these blocking the scarce resources of the country prevails, but there are always exceptions! Some of them function much better than private organizations and aim at societal development, making billions of cash every year. Which is why, strategically investing in these PSUs can prove to be good long-term investments.
So, today, we will be telling you about the top 5 PSU stocks in India where you can invest your money to earn consistent returns.
What are PSUs?
PSUs stand for Public Sector Undertakings. The Government of India (whether Central or State or together) owns these with a majority share of 51% or more. These PSUs play a pivotal role in the development of the industrial base contributing a massive amount to the economy.
A round of applause to the biggies!
PSU companies' contribution to the economy
These companies help achieve socio-economic objectives by providing vast resources for the country’s citizens. They are profoundly interrelated with the core sectors of the economy. The presence of a PSU in each sector helps control the price of the goods and services in that sector. They facilitate the short-term commercial interest and take action keeping in mind the long-term economic gains. Now that’s some pro strategizing!
These companies have also contributed to providing infrastructure to the rural segments, making it easier for private companies to target the rural markets as well. They are an integral part of the revenue generation for the Government of India, in the form of dividends, corporate taxes, etc. They are essential to society because they contribute a significant share in the country’s total Gross Domestic Product (GDP) and Capital Formation. They certainly sound like corporate superheroes!
Why should you invest in PSUs?
One reason to invest in this segment is that these stocks are currently undervalued and may get the valuation because various companies are entering into disinvestment. What's more, these companies provide good dividend yields.
Due to the pandemic, there is a drop in the valuation while the earnings of these companies have remained flat. As a result, the P/E ratio has decreased. Hence, this will provide the opportunities to invest in this segment for the medium to long term. Life’s giving you lemons; let’s make lemonade!
Apart from this, these companies provide continuous and steady dividends to their shareholders. If you are looking for a regular passive income as an investor, you may invest in PSU stocks, as it is mandated by the Central Government to provide at least 30% of PAT as an annual dividend. Safe and sound!
Criteria to consider while investing in PSUs
The P/E ratio, companies paying high dividend yield, and past few years’ profitability performances need to be considered in the portfolio basket. While viewing some qualitative factors for shortlisting the companies, one must keep in mind whether the company has budget constraints or not. Furthermore, one can add on companies with international exposure, i.e., the ones that deal in exports.
Top 5 PSU stocks
Here's a list of the leading PSU stocks in India:
The National Mineral Development Corporation works under the guidance of the ministry of steel by the Government of India. The company has performed quite efficiently in the past few months and has also diversified its customer base. It is the largest iron ore producer in the country, with activities involved in the exploration and manufacturing of ore. The company usually maintains a high level of cash balance and continuously invests in Capex.
The company is part of the Nifty-50 index on NSE and is a dominant player in inter-state power transmission services. It provides around 90% of power transmission services in the country while operating under the Ministry of Power by the Government of India. One good news for dividend lovers is that it has constantly increased its dividend payouts. The company operates in different verticals, including transmission, telecom, RLDC, consulting, and many more.
The Oil & Natural Gas Corporation (ONGC) is one of the largest producers of oil in the country that has developed in-house capabilities for all of its operations regulated by the ministry of petroleum under the Government of India. It fulfills around 70-75% of the total domestic demand. The regulatory bodies are also planning to set a floor price for natural gas. However, the company has a continuous threat due to changes in crude & natural gas prices.
SBI is the country’s largest PSU bank. It has established its roots in international countries through 200+ offices. Since its inception, the bank has contributed to the country’s economic development by taking multiple initiatives for the rural population. The company has a strong loan book with good asset quality. Moreover, as compared to its other public counterparts, the company has a lower amount of gross non-performing assets.
India’s leading natural gas company, GAIL has supremacy in the transmission & distribution of LPG. It operates in the petroleum and gas industry working under the ministry of petroleum and natural gas. The company has tried to expand and diversify its operations to mitigate the risk of concentration.
According to research, the aforementioned stocks were some of the leading PSU stocks in India. It is forecasted that these PSU stocks' valuation will soon catch up. So be prepared!
Before you invest, decide your investment horizon and do a qualitative and quantitative analysis of the sector. FYI, Political issues also influence this category since changes in legislation may impact the operations of these businesses. So yeah, there you go.
Is there any decent PSU stock to buy in India that we've overlooked? Let us know what you think in the comments area. Good luck with your investments!