Global volatility, not government, may spark a PSU renaissance

In fact, Arunish Chawla, secretary of the government’s department of investment and public asset management (Dipam), recently urged fund managers to include PSUs in their portfolios during a media briefing, touting their high dividend-generating capabilities.

He pointed out that state-run firms delivered a record ₹1.5 trillion in dividends to the government in FY25. For FY26, the government expects to receive ₹69,000 crore in dividends from PSUs. However, experts caution against the allure of high dividend yields, as they can lead investors astray to pick non-performing companies at a time when a broad-based rally in PSU stocks is highly unlikely.

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This comes as retail investors continue to reel under the BSE PSU Index’s 19% drop from its 52-week high, a peak reached during an overhyped two-year surge. Their enthusiasm for PSUs has waned since then, despite the index currently outperforming the Sensex. Hence, luring them back into PSUs with the promise of dividends might create misguided return expectations, noted experts.

Dividend illusion

“Dividends protect your downside. But they never drive re-ratings in stocks. Earnings growth does. Hence, dividends cannot be the sole argument for investing in PSUs,” Dhimant Kothari, fund manager at Invesco MF, told Mint.

A Mint analysis of BSE PSU Index constituents revealed that in FY24, their aggregate net profit grew by 44%. In comparison, dividend payments increased by about 28% (after a decline in the previous year), resulting in a dividend payout ratio of 13%. The median payout ratio for these PSU stocks over the past six years was 20%.

Kothari pointed out that PSUs were continuously derated between FY18 and FY20, despite dishing out dividend yields as high as 7-8%.

This means that the PSUs’ propensity to pay higher dividends each year comes at the cost of lower reinvestments in capacity expansion, which could result in poorer execution capabilities.

One of the main concerns regarding PSUs is their elongated execution timelines, which create huge backlogs in their order books. Vinit Bolinjkar, head of research at Ventura, a stock broking firm, said they need to spend more on building capacity and capability to deliver faster.

“Indian PSUs have enough structural levers to generate good returns on capital investment if they reinvest these profits. By giving them as dividends, they are taking away some returns from their growth,” highlighted Anil Rego, founder and fund manager at Right Horizons PMS.

Rego also pointed out that since dividends also form a critical part of the government’s non-tax revenues, these companies aim to pay higher dividends every year. 

Still, it might be of little appeal to investors, particularly high networth individuals, as their dividend incomes are now taxed at their respective income tax slab rates under new rules introduced in the Finance Act 2020. Rego adds that this renders dividends even more inefficient, and hence, they should never be the driving force behind investing in PSUs.

Second look

But there is a hidden draw. Attractive valuations and strong growth trajectories have increased the appeal of select PSUs lately, especially when the broader market deals with heightened global volatility. 

Bolinjkar from Ventura noted that investors are looking for good revenue visibility, long-term government support, and low leverage in balance sheets when picking PSU stocks, which are currently trading at a bargain.

Experts think players from the defence, power, utility and renewable energy sectors, along with public sector banks (PSB), are looking lucrative.

“We expect around 14-16% earnings growth for PSUs between FY26-30, and they are relatively insulated from global macroeconomic turbulence—particularly the PSBs,” said Kothari from Invesco Mutual Fund.

“In terms of earnings visibility for the next couple of years, power, utility and defence sectors are best placed. From a longer-term perspective, even railway companies look attractive,” he added.

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Ajit Mishra, senior vice president of research at Religare Broking, said defence companies stand out with strong growth potential among the enticing Psus. This is fuelled by increasing government budgets, a push for indigenisation, rising exports, and favourable geopolitical dynamics.

In fact, Hindustan Aeronautics Ltd (HAL) bagged orders worth ₹62,700 crore from the government last month—the largest order in terms of value, where it will supply 156 light combat helicopters to India’s armed forces. Government project awards, anyway, doubled to ₹2.25 trillion on a year-on-year (y-o-y) basis in March, sharply above the FY25 monthly average of ₹1.05 trillion, according to a recent JM Financial Services report.

Select PSUs receive orders

However, only defence and power sector projects dominated the government’s latest orders, indicating a pickup in spending in select critical infrastructure areas. While roads, water and metro segments saw muted tendering activity in Q4FY25, project awards for the power transmission and distribution and renewable sectors remained robust, as the government currently rushes to meet the expected rise in India’s power demand, noted HDFC Securities.

Further, Elara Securities expects power companies to report strong earnings in Q4 as the onset of summer and a rise in peak power demand revived electricity generation in the March quarter.

However, retail investors currently remain unconvinced. Infrastructure, energy, and power funds saw their first outflows in two years in March, which was also the largest redemption post-covid, noted an Elara Securities report. While inflows into pure equity schemes slowed to a one-year low last month, thematic and sectoral funds witnessed the biggest slowdown, with a meagre inflow of ₹170 crore in March, collapsing from a ₹22,400-crore inflow in June.

Mishra from Religare Broking thinks that at this juncture, a hybrid strategy—focusing on consistent dividend payers while selectively identifying PSUs with growth catalysts—can help investors benefit from both stability and upside potential in the future.