IRFC, BHEL to PFC: PSU stocks surge up to 6% after revision in capital restructuring norms; what should you do?

PSU stocks: Several PSU stocks, including Indian Railway Finance Corporation (IRFC), Bharat Heavy Electricals (BHEL) and Power Finance Corporation (PFC), witnessed healthy gains, jumping up to 6 per cent in morning trade on BSE on Tuesday, November 19, after the Union Finance Ministry revised norms for dividend payments, share buybacks and stock splits at state-run companies to improve capital management and bolster performance of their equities.

Shares of Cochin Shipyard, Housing & Urban Development Corporation (HUDCO), Indian Renewable Energy Development Agency (IREDA) and IFCI jumped up to 5 per cent.

The BSE PSU index jumped 2 per cent during the session, with stocks rising 2-6 per cent.

“PSU stocks are trading in the green today after DIPAM revised the dividend, buyback and bonus issue norms for CPSEs and included financial sector CPSEs in the norms,” said Manish Chowdhury, the head of research at StoxBox.

As Mint reported earlier, the government has revised dividend payments, share buybacks, and stock split norms of PSUs (public sector undertakings) to improve capital management and bolster the performances of their equities.

The government has asked state-run non-banking financial companies (NBFCs) to pay a minimum annual dividend of 30 per cent of their profit subject to legal provisions, according to the Department of Investment and Capital Asset Management (DIPAM) guidelines on Monday.

Low-level buying after sharp selloff

Most PSU stocks have experienced sharp selloffs since October, driven by profit-booking amid weak Q2 earnings and high valuations. Notable decliners include Indraprastha Gas, CPCL, MOIL, Gujarat Gas, and IOCL, which dropped between 26 per cent and 42 per cent from October 1 to November 18.

Stocks such as SAIL, IREDA, SJVN, RVNL, BPCL, GAIL, Hindustan Copper and NBCC have declined over 20 per cent in the same period.

“Several PSU stocks were beaten down heavily in the recent past. They are now rising, maybe due to lower-level buying,” said Saurabh Jain, assistant vice president of research (retail equities) at SMC Global Securities.

Speculations about OFS, QIPs lift PSU banks

Some PSU banking stocks are gaining amid rising speculations that the government will offload its minority stake in select PSU banks.

“PSU bank shares are scaling new heights on speculation that the government is to offload its minority stake in Central Bank of India, Indian Overseas Bank, UCO Bank, and Punjab and Sind Bank to meet the mandated minimum public shareholding (MPS) norms of SEBI,” said Atul Parakh, CEO of Bigul.

“The Centre is set to move the Cabinet for stake sale through OFS in four PSU banks with over 93-98 per cent stakes. Alternatively, QIPs can be resorted to by these banks; their own fundraising potential may go up to ₹30,000 crore,” Parakh said.

“Five out of twelve public sector banks will have to comply with the 25 per cent public shareholding norm by August 2026. The dual advantage that capital raising through QIPs provides to the benefit of banks by boosting the capital base and net worth, coupled with the ability to toggle between OFS and QIP routes depending on market conditions, is driving investor interest in these stocks,” said Parakh.

What should investors do?

Several experts believe the entire PSU segment is not attractive at this juncture. One should bet selectively on PSU baking stocks because their valuations are relatively cheaper than their counterparts.

“Q2 earnings of many companies have been disappointing. Foreign institutional investors (FIIs) have been selling, and valuations have been higher. One could consider PSU bank stocks as their earnings have been good, and their valuations are low,” said Jain.

Defence stocks could come back into focus in the next few months.

“The government expenditure has been low in the first six months. There could be some activity in the defence sector stocks around the Union Budget 2025,” Jain said.

Chowdhury believes that the revision of the dividend, buyback and bonus issue guidelines would provide more runway for creating shareholder returns and improving companies’ business performance and operational efficiency.

“Recent correction in most PSU stocks has provided a bottom-fishing opportunity to buy sound fundamental businesses at reasonable valuation from a medium to long term perspective. We sense that one can consider buying SBI, HAL and MOIL at current levels for at least a 20 per cent upside over a 12-month horizon,” said Chowdhury.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.