Best PSU Stocks to Buy in India 2023
Post-Independent India’s economy was in a mess after years of exploitation by colonial powers. Insufficient industrial base, poor infrastructural and technological framework, and untrained human resource were not the ideal combination for a take-off. To make India self-reliant and plan its steady economic growth, the country adopted a path of planned development in which public-sector units, or PSUs, had a crucial role to play.
These PSUs became the engine of India’s economic growth, producing key commodities such as steel and oil as well as manufacturing heavy machinery and providing banking and other financial services. In turn, they also generated employment for lakhs of people. The government also ensured that they remain competitive and gave them enough firepower to compete with private sector. These led to stellar growth for many PSUs, many of whom also had an edge in terms of market access.
The government listed many of these PSUs on the stock market to raise funds and for various other regulatory purposes. Many of these stocks gave good returns. The BSE PSU Index, which has some of these state-owned companies as constituents, has risen from around 7,200 to around 11,100 in the last five years, making it one of the best performing indices.
What are PSU stocks?
PSUs, or public sector undertakings, are companies in which a majority of the stake is held by the government. Depending on the type of the government that holds the ownership, there are State Public Sector Undertakings (SPSUs) and Central Public Sector Undertakings (CPSUs). Regardless of whether the unit is SPSU or CPSU, the minimum holding of the government should be 51%.
In India, PSUs focus on rapid economic growth with an emphasis on infrastructural development and expansion that help to build a solid foundation for the country. PSUs mainly operate in core sectors like coal, finance, capital goods, power, infrastructure, metal, oil and gas, and mining.
Classification of PSUs
In India, PSUs are classified into three categories based on their ownership and the level of control by the government. They are:
Central Public Sector Undertakings (CPSUs): Companies which are under the direct control of the Central government or other public undertakings with more than 51% capital share ownership. CPSUs can further be classified into strategic (ammunition and defence equipment, other items related to defence, atomic energy and railways) and non-strategic CPSUs (other PSUs apart from the strategic sectors).
State Public Sector Undertakings (SPSUs): These are companies which are under the direct control of a state government or other state-run public undertakings that own at least 51% share ownership.
Public sector banks (PSBs): These include banks where the central government has more than 51% share ownership.
Based on factors like income and annual revenue, some of the common categories of PSUs are:
Maharatna: It is the highest category of PSUs. These are enterprises that have already attained the Navratna status. Maharatna companies enjoy greater financial autonomy and operational flexibility.
Navratna: To qualify for the Navratna status, Miniratna-category-1 and Schedule 'A' status is a pre-requisite. It should also hold a record of at least three ‘Excellent’ or ‘very good’ Memorandum of Understanding ratings during the last five years. A Navratna company can spend up to 30% of their net worth not exceeding Rs 1,000 crore. It can also decide to enter into joint ventures, form alliances, and float subsidiaries abroad.
Miniratna: There are two categories of Miniratna companies, Category I and Category II. To achieve the Miniratna Category-I status, the CPSE should earn a minimum profit of Rs 30 crore (pre-tax) for at least one year in the previous three years. Additionally, it should make profit during the last three years continuously. For category II, PSUs must earn a profit for three successive years and have a positive net worth.
Best PSU stocks to buy
PSU stocks are significantly influenced by government policies. Also, the extent to which the government plans to trim its stake in a PSU in the future has an effect on the stock prices.
It is evident that some of the best stocks of the country come from the PSUs. As an investor, it is best to look at the industry and study the indicators for investing in the top PSU stocks.
Some of the best PSU Stocks to buy in India 2023 are:
Oil and Natural Gas Corporation (ONGC)
ONGC, a Maharatna company, is the largest oil exploration and production company in India. The company currently operates across the globe and is one of the highest dividend-paying enterprises in the country. Though factors like fluctuation in crude oil prices and volatility continue to directly affect the profits of the company, ONGC has successfully managed to keep a low debt level and ensure good returns.
The consolidated total income of the company grew from Rs 429,534 crore in FY19 to Rs 692,903 crore in FY23. During this period, the net profit grew from Rs 30,458 crore to Rs 32,743 crore. The dividend yield of ONGC was at 6.88 in contrast with average of 3.62 for all Nifty 50 companies.
Coal India Ltd (CIL)
Coal India is another Maharatna company. CIL accounts for almost 40% of the commercial energy requirements of India. It is the is the largest coal producing company in the world and enjoys a near-monopoly status in India. CIL has set an ambitious target of 1 billion tonne coal production in 2024-25.
The annual total income of the company grew from Rs 105,420 crore in FY19 to Rs 144,802 crore in FY23. During this period the net profit of the company rose from Rs 17,463 crore to Rs 28,133 crore. The dividend yield of Coal India was 10.36.
National Mineral Development Corporation Ltd (NMDC)
NMDC is an iron ore producer and exporter and also engages in the exploration of other minerals like copper, lime stone, dolomite, gypsum, etc. It also runs the only mechanized diamond mine in India at Panna, in Madhya Pradesh. NMDC operates three fully mechanized mines which have high-grade iron ore reserves in the states of Chhattisgarh Karnataka. It is a Navaratna enterprise under the administrative control of the Ministry of Steel.
The annual income of the company grew from Rs 12,741 crore in FY19 to Rs 18,435 crore in FY23. During the same period the company saw an increase in the net profit from Rs 4,637 crore to Rs 5,537 crore. The dividend yield of NMDC was at 6.17.
GAIL (India) Ltd
It is the India's natural gas flagship company primarily engaged in the production and transportation of LPG and natural gas. The company has diversified its business into various other segments like petrochemicals, liquid hydrocarbons, telecom, etc. It owns a network of around 15,413 km of natural gas pipelines and commands 70% market share in gas transmission.
The consolidated total income of the company nearly doubled from Rs 77,404 crore in FY19 to Rs 146,996 crore in FY23. The net profit, however, fell from Rs 5,777 crore in FY19 to Rs 4,087 crore in FY23, mainly due to volatility in prices of gas. But the dip in profit came after its bottom-line jumped to Rs 10,541 crore in FY22. The dividend yield of GAIL was 3.61.
NTPC along with its subsidiaries and joint ventures is the largest power company in India engaged in generation of electricity. It is also involved in engineering, project management, construction management, and operation and management of power plants.
The consolidated annual revenue of the company grew from Rs 102,533 crore in FY19 to Rs 177,977 crore in FY23. The net profit during this period grew from Rs 13,362 crore to Rs 16,341 crore. The company’s dividend yield was at 3.76.
State Bank of India (SBI)
India’s oldest and largest bank in terms of business and assets, SBI is counted as one of the top PSUs in India. It is headquartered in India's financial capital, Mumbai. Presently, the Government of India holds 57.52% stake, compared with 61.58% in 2012.
The consolidated total income (interest earned plus other income) of the lender grew from Rs 330,687 crore in FY19 to Rs 473,378 crore in FY23. The net profit during this period soared from Rs 3,085 crore to Rs 56,558 crore. The bank’s dividend yield was at 1.90.
Stringent policies and bureaucracy can sometimes affect PSU stocks adversely, but the recent wave of privatisation is attracting many investors. Higher dividend yields and attractive valuations make PSU stocks a good investment choice. But to pick the best PSU stocks, a given is to do research on the company and do keep in mind that share price movement of a PSU may not be the best indicator of return due to high dividend payout.
Frequently Asked Questions
What are the major sectors where PSUs operate?
Coal, finance, metal, mining, power, infrastructure, capital goods are some of the critical PSU sectors.
What are the benefits of investing in PSUs?
PSU stocks are a comparatively lower-risk investment options and offer regular dividend income.
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