Top 5 Fundamentally Strong PSU Stocks: Opportunities Amidst 50% Decline from Peaks

The Investment adage, “Buy when there’s blood in the streets,” resonates deeply in today’s turbulent financial landscape. As investors navigate the current climate, the Indian stock market has experienced notable volatility over the past two months, with foreign investors increasingly withdrawing from Indian equities. Such conditions, while daunting, also present a strategic opportunity for disciplined investors to acquire high-quality stocks at discounted prices.

Among the numerous sectors to explore, Public Sector Undertakings (PSUs) stand out as vital contributors to India’s economic framework. These entities, where the Indian government holds a majority stake, play a crucial role in various sectors, including energy, banking, and industrial goods. Historically known for their financial reliability, PSUs are integral to the nation’s growth narrative.

Recently, however, PSU stocks have come under selling pressure. Following a robust rally last year, many PSU valuations have reached heightened levels, prompting investors to book profits. The sentiment has soured further due to a lack of significant developments related to PSUs during the July-September 2024 period. This downturn provides an opportune moment to invest in fundamentally strong PSUs that are currently trading at attractive valuations.

With several PSUs experiencing declines of up to 50% from their peak prices, let’s explore five such stocks characterized by solid financial foundations, promising growth prospects, and unwavering government support.

1. Cochin Shipyard Ltd.

Leading our list is Cochin Shipyard Ltd., headquartered in Kochi, Kerala. As India’s premier shipbuilding and maintenance company, Cochin Shipyard is well-regarded for its ability to deliver high-quality vessels for both commercial and defense purposes. With its expertise in ship design and engineering, the company plays a pivotal role in India’s maritime sector.

From a peak price of ₹2,977 on July 8, 2024, Cochin Shipyard’s shares have plummeted by over 50%. The recent downturn was exacerbated by the government’s decision to reduce its stake through an offer for sale (OFS). However, the company’s financials remain robust, with revenues and net profits exhibiting compound annual growth rates (CAGR) of 13.2% and 11.2%, respectively, from FY20 to FY24. With an average Return on Equity (RoE) of 28.6% and Return on Capital Employed (RoCE) of 39.4%, Cochin Shipyard is well-positioned for growth.

Looking ahead, Cochin Shipyard is focusing on expanding its maritime capabilities with key infrastructure projects. The establishment of its International Ship Repair Facility (ISRF) and a 310-meter dry dock, developed with an investment of ₹27.7 billion, is expected to enhance shipbuilding and repair capacities while creating jobs and attracting ancillary industries.

2. Shipping Corporation of India Ltd. (SCI)

Shipping Corporation of India Ltd. (SCI) is another notable PSU on our list. Based in Mumbai, SCI ranks among the largest shipping companies in India, operating a diverse fleet that includes tankers, bulk carriers, and container vessels. Its strategic significance to India’s trade and defense logistics, coupled with ongoing modernization efforts, fortifies its competitive edge.

Following its peak price of ₹384 on July 29, 2024, SCI’s shares have decreased by 44%. Despite this, the company has reported a 26.2% year-on-year increase in consolidated revenue from operations to ₹15.1 billion for the June 2024 quarter, with net profits soaring 70% year-on-year to ₹2.9 billion. While the tanker segment faces sluggish spot freight rates, the company is adapting by utilizing its vessels for longer journeys amidst geopolitical tensions in the Middle East.

With a remarkable share price increase of nearly 106% over the past year, investor sentiment regarding SCI remains optimistic, particularly concerning the potential for privatization, although clarity on this matter is still pending.

3. ITI Ltd.

Based in Bengaluru, ITI Ltd. is a pioneer in telecom equipment manufacturing, providing essential support to India’s digital infrastructure. The company has diversified its operations into secure networking, data centers, and defense communication solutions, catering to government and enterprise sectors.

However, ITI shares have seen a decline of over 40% from their peak prices. The company’s recent financial performance has raised concerns, having reported losses in FY23. Yet, with the government’s push towards telecom and 5G infrastructure, ITI is poised for recovery. The company recently secured a substantial order worth ₹24.2 billion from BSNL, marking a significant milestone and paving the way for advancements in the 5G technology arena. Additional initiatives, such as the manufacturing of electronic voting machines and solar panels, demonstrate the company’s potential for future growth.

4. Bharat Dynamics Ltd. (BDL)

Bharat Dynamics Ltd. (BDL), headquartered in Hyderabad, plays a crucial role in India’s defense sector by specializing in guided missile production for the armed forces. BDL is instrumental in supporting India’s goal of self-reliance in defense through indigenous missile systems and significant investments in research and development.

BDL has faced a 40% decline from its peak price of ₹1,800 in July. However, the company’s management remains optimistic about its operational performance, leveraging a robust order book valued at ₹194.3 billion as of March 2024, with an additional ₹200 billion in orders anticipated over the next few years. This solid order pipeline positions BDL to benefit from ongoing defense modernization efforts.

5. Indian Railway Finance Corporation Ltd. (IRFC)

Last but not least, Indian Railway Finance Corporation Ltd. (IRFC) serves as the financing arm of Indian Railways, funding critical projects such as rolling stock acquisition, electrification, and high-speed rail initiatives. Known for its stable revenue streams supported by long-term contracts with Indian Railways, IRFC is a vital player in the nation’s transport infrastructure.

From its peak of ₹229 in July, IRFC’s share price has fallen by 39%. Nevertheless, the company has consistently demonstrated strong financial performance, boasting a compounded annual growth rate (CAGR) of 19.1% in revenue and a 23.3% CAGR in net profit over the past five years. IRFC’s strategic relationship with the Ministry of Railways allows it to maintain a low-risk profile, positioning the company to thrive amidst government plans for railway modernization and expansion.

In conclusion, While the current market landscape presents challenges, it also offers unique opportunities for investors willing to explore fundamentally strong public sector undertakings. The PSUs highlighted above, despite recent price corrections, remain well-positioned to benefit from favorable government policies and long-term growth trajectories.

In addition to these stocks, other entities such as Housing & Urban Development Corporation Ltd (HUDCO), Ircon International, and Engineers India are also worthy of consideration due to their similar price declines.

As investors, now is the time to capitalize on these opportunities and look toward a promising future.