Looking for PSU stocks with value? Khemka's 2 picks

Siddhartha Khemka, Head-Retail Research, MOFSL, says one stock is GAIL which is now getting into green hydrogen project and the core business would also continue to grow well. We are expecting a 14% EBITDA CAGR driven by rising natural gas transmission, improvement in the petchem segment and we believe a one-year target of 215 is quite possible. The other stock is Oil India. We believe that, again, some of the newer oil drilling projects that they are getting in the Andaman and Nicobar Islands will increase capacity.

There was a bit of a chirpiness coming in, at least for the mid and smallcaps today. We are seeing a good move compared to the benchmark indices. Do you think we could see that outperformance come in for the mid and smallcaps or is this just one of the signs that is coming in for the mid and smallcap?

Siddhartha Khemka: We saw a good correction in the mid and smallcaps in the last couple of weeks and there were definitely a lot of concerns from the regulatory side, right from SEBI talking about the froth being in the mid and smallcaps, the mutual funds reporting the time to liquidate 25% and 50% of the stocks and definitely there was a cautious view.


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Markets were sitting at all-time high and we saw good profit booking across the board. Having said that, valuations for midcaps definitely have not come in the comfort zone. They are high. But the correction of 10-15% in the index, about 8% to 10% index, and 15-20% in several midcap stocks that kind of gives a good entry opportunity. Given the global backdrop, the big event is now through – the Fed meet and the outcome.

The Fed commentary definitely calmed a lot of nerves globally that there would be three rate cuts this year while the market was started factoring in whether there could be three or there could be two and direct impact that we could see because of the lesser liquidity flows towards emerging markets could have be in the mid and smallcaps. So, yes, definitely there is an opportunity in the mid and smallcaps but you cannot rule out volatility. Largecaps are much better placed in terms of valuation comfort, in terms of growth visibility, and the ongoing or the upcoming events including the elections which could again add to some volatility in the market.

Overall, when you talk about the metals pack, what is the view in terms of Nifty Metal? Do you find anything attractive in the basket or is it time to just wait and watch on this?

Siddhartha Khemka: There is some merit in looking at metals. You have seen a super cycle in the previous financial year and from there, we saw how the margins kind of compressed. But we are looking at a scenario where China is looking at putting some stimulus to grow its economy. They are targeting higher economic growth.

Globally too we are seeing strong economic growth, be it US, be it Japan, be it India. Indian economic growth has been pretty strong. And a lot of these metal companies, the results we saw was largely driven by the domestic market. So, we expect A) the domestic market to continue to lead in terms of demand, plus recovery in some of the global markets that is leading to higher commodity prices, that is also kind of supporting the overall metal packs. Within the pack, Hindalco is something that is present in the aluminium as well as copper, which we believe could do well from the non-ferrous side and within the ferrous side, we like Tata Steel, Jindal Steel, we believe both of them could continue to do well in the near term.

I want your view in terms of overall the PSU baskets. First, we saw those defence players run up. Now we are seeing the power names running up as well. In the defence pack, is there any still value left? Can you play any of these PSU names specifically, not only defence, but anything that is value in the PSU side?

Siddhartha Khemka: There is a lot of value in some of the PSU names. Some of the sub-segments have run up ahead of the fundamentals and that is why some consolidation and profit booking. But if you look at the larger space, oil and gas is another space where we believe that a lot of value is still left.

So, there are two stocks particularly that we like in the space, A) GAIL India. GAIL is entailing a 4.3 TPD green hydrogen project, which we believe will go on to meet its long-term objective of 20% hydrogen blending in natural gas, that is a big change that we saw in some of the other power stocks where they consciously moved towards the renewable and green energy from the fossil fuel and that led to a lot of re-rating be it Tata Power, be it other power stocks.

I think that kind of story will play out in GAIL where they are now getting into this green hydrogen project and on the core business also we believe that the core business would continue to grow well. We are expecting a 14% EBITDA CAGR driven by rising natural gas transmission, improvement in the petchem segment and we believe a one-year target of 215 is quite possible.

The other stock is Oil India.

We believe that, again, some of the newer oil drilling projects that they are getting in the Andaman and Nicobar Islands that will increase capacity, in the near term the commissioning of the additional capacities in Numaligarh refinery by September 25 which could add to another Rs 45 billion of PAT run rate to current 20 billion per annum in FY24, so that is a huge jump with the newer capacity that can come, so again another oil and gas, so one in the oil space, upstream oil company and the other in the gas space. I think these two PSUs could do really well in the next one year.

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