Indian public sector undertakings (PSUs) have experienced a remarkable revival in recent years, with Motilal Oswal Financial Services (MOSL) spotlighting their long-term potential in a detailed report. While FY25 brought in some normalization after a stellar post-COVID run, MOSL says the foundational strength of PSU businesses remains intact. The brokerage believes select PSUs across banking, defence, and energy sectors remain well-positioned to generate wealth over the next several years. “Our top PSU ideas are SBI, HAL, BEL, PowerGrid and Coal India,” said MOSL in its latest note.
PSU Revival: From Slump to Strength
MOSL highlighted that PSUs delivered a compounded annual profit growth (PAT CAGR) of 36 percent during FY20–25—higher than the 30 percent reported by India Inc overall and far ahead of the private sector’s 26 percent. This robust profit performance contributed to a 32 percent CAGR in the BSE PSU Index during the same period, significantly outpacing the Nifty50’s 19 percent CAGR.
“FY25 did witness some moderation,” MOSL acknowledged, noting that overall PSU profits dipped 2 percent YoY, primarily due to weak performance in the Oil & Gas (O&G) sector. Excluding O&G, PSU profits rose 16 percent in FY25, following a strong 23 percent jump in FY24.
Earnings Composition and Sectoral Highlights
BFSI, particularly PSU banks, was the key driver of profit growth in FY25, with PSU banks clocking a 26 percent increase. O&G, by contrast, declined 44 percent. “This divergence illustrates the need to be selective in PSU exposure,” MOSL said, underlining that strength persists in sectors with structural tailwinds such as financial services, defence, and infrastructure.
Importantly, the report shows that the PSU contribution to India Inc’s overall profit pool surged to 37.5 percent in FY25—up from just 29 percent a year ago and only 18 percent in FY20. “The turnaround in PSU profitability is structural, not cyclical,” MOSL asserted.
Valuation Comfort and Market Cap Trends
Valuations for PSU stocks have moderated since their peak. The BSE PSU Index’s market cap hit ₹74 lakh crore in July 2024, then declined to ₹51 lakh crore in February 2025 amid a broader correction, before rebounding to ₹64 lakh crore in June. The current market cap stands 14 percent below its all-time high, providing room for upside, according to MOSL.
The BSE PSU Index now trades at a P/E of 11.7x, down from 13.8x in July 2024 and up from 9.8x in February 2025, suggesting more reasonable valuations.
A Decade in Review: Uneven but Encouraging Growth
The PSU Index delivered a 10 percent CAGR over the last decade (June 2015–June 2025), underperforming the Nifty50’s 12 percent CAGR. However, most gains came in the second half of the decade. The index contracted 9 percent between 2015–2020, but rebounded with a strong 32 percent CAGR from 2020 to 2025.
Notably, the share of loss-making PSUs in the overall profit pool fell dramatically—from 45 percent in FY18 to just 1 percent in FY25. “The PSU basket is no longer dragged by chronic underperformers,” said MOSL, noting a meaningful transformation in efficiency and governance.
Top Picks and Growth Drivers Ahead
Looking ahead, MOSL expects a 10 percent PAT CAGR for its PSU coverage universe over FY25–27. This growth will be led by BFSI (53 percent contribution to incremental profits), followed by O&G (20 percent), and Metals (12 percent).
Strategically, MOSL is bullish on select PSUs that benefit from policy tailwinds, Make-in-India initiatives, and infrastructure push. SBI remains a top pick due to robust credit growth and stable asset quality. HAL and BEL are favoured for their role in defence indigenization, while PowerGrid benefits from power transmission investments. Coal India also finds favour due to its consistent cash generation and role in India’s energy security.
Overall, while FY25 marked a normalization phase for PSU stocks after an extraordinary post-pandemic rally, MOSL believes the long-term story remains compelling. “With solid fundamentals, improving governance, and favourable policy tailwinds, PSUs deserve a spot in long-term investor portfolios,” the brokerage said. The transformation of Indian PSUs from inefficient state behemoths to efficient, growth-oriented enterprises is well underway—and investors who spot the structural shifts early could be handsomely rewarded.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
