Indian stocks are among the most expensive in the world. And the post pandemic rally has made the stock market even more expensive. Most stocks have doubled or even tripled in value since the end of March last year even if their profits are yet to scale the pre-pandemic highs.
This is most clearly visible in the benchmark BSE Sensex. The index is up 77 percent since the end of March 2020 and at current level, it is 25 percent higher than it was at the beginning of the 2020 calendar year.
The valuation multiple has expanded in the expectation of a faster growth in corporate earnings in the current fiscal year (FY22) and even in FY23.
While there is a widespread consensus towards higher corporate profitability in FY22 and FY23 after the economic disruption caused by COVID 19 in FY21 and April to June this year, the record high valuation raises the risk of a market volatility and even a sharp correction if the corporate earnings in the quarter of FY22 are worse than expected. A poor show in the first quarter will also pull down the expected earnings for FY22.
Given this, many analysts and investment advisors are asking investors to book some profits in the high growth and high beta stocks that led the market rally in the last 15-months and move their money to value and high dividend yielding stocks.
The additional dividend yield that any of these value stocks provide is an icing on the cake.
This is especially true of the large listed public sector undertakings (PSUs) such as Coal India, Indian Oil Corporation, Petronet LNG, Oil India, Power Finance Corporation and Power Grid Corporation among others.
While these companies are industry leaders with a strong balance sheet and large asset base, these PSUs have some of the cheapest stocks on the bourses right now.
This makes PSUs an ideal investment candidate in the current market where the valuations have hit through the roof.
Here’s the list of ten central PSUs that currently offer the best bang for the investors’ money. We have selected these stocks on the basis of a host of valuation parameters such as price to earnings multiple, price to book value ratio, dividend yield and profitability ratio such as return on net worth (RoNW). We have only considered the stocks that have been profitable in FY21.
1. Power Finance Corporation (PFC) tops the value list among PSUs right now. The infrastructure finance company is currently trading at a P/E multiple of just 4X and its trading at 45 percent discount to its book value. It also offers a juicy dividend yield of 7.4 percent, nearly 150 basis points higher than the current interest rate on bank FDs. Besides, while interest on FDs are taxable, income from dividend is tax-free if it’s less than Rs 10 lakh per year. At 20 percent, its return on net worth is also much higher than its P/E multiple making it an attractive investment candidate. The company reported a net profit of Rs 11,800 crore in the first nine-months of FY21 against its current market cap of Rs 34,000 crore.
2. The crude oil producer Oil India is next on the list with a P/E multiple of 5X and price to book value ratio of 0.55x. It also offers a dividend yield of 7.5 percent. The company’s profits took a beating in FY21 due to a decline in crude oil prices but it is expected to report a sharp jump in profits in FY22 as crude prices have doubled in the last one year. The current low valuation makes it good at the current price. The stock is already up 50 percent in the last one-year and could go even higher.
3. Coal India is ranked three on the value scale with P/E multiple of 7.6X and price to book value of 2.6x. The stocks currently offer a dividend yield of 7.7 percent which is again higher than the current yield on bank FDs. The coal prices just like other commodities are rising, which could translate into superior profits for the company over the next two years.
4. Next on the list is the hydropower company SJVN Ltd (formerly Sutlej Jal Vidyut Nigam Ltd). The Shimla-based company is currently one of the cheapest power producers on the bourses. It is trading at a P/E multiple of 6.8X and price to book value of 0.9x and dividend yield of nearly 7 percent. Its returns on net worth at 14.4 percent are among the highest in the power sector.
5. The housing and urban infrastructure lender HUDCO (Housing & Urban Development Corporation) is next on the list with a P/E multiple of 6.9X and price-to-book value of 0.8x. Its dividend yield is also at a juicy 6 percent. All this makes it one the cheapest NBFC companies on the bourses right now. HUDCO is one of the candidates for privatisation that is also expected to lift its share price.
The other five stocks in our list include Hindustan Petroleum Corporation (P/E ratio of 4 and dividend yield of 7.7 percent), Indian Oil Corporation (5X and 10.3 percent), Rites India (14.7X and 6.2 percent), Petronet LNG (14x and 5 percent) and Power Grid Corporation (10X and 4.3 percent).
A portfolio of these PSUs stocks will not only de-risk your portfolio from market volatility but could also be a source of tax-free annual income in the form of equity dividend that would beat bank FDs.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).