The Rs 6.76 lakh crore blockbuster rally in PSU bank stocks, which gave 7 multibaggers in last one year, is now staring at a turning point as the Sebi deadline to meet 25% minimum public shareholding (MPS) rule ends this August.
Besides improvement in fundamentals such as sharp earnings growth and the turnaround in asset quality, one of the factors behind the bull run is the low free float factor. Out of the 7 PSU banks which have more than doubled investor wealth in the last one year, Punjab National Bank (PNB) meets the 25% criteria while Union Bank Of India became compliant last month following a Rs 3,000 crore QIP.
The government now has to cut its stake in all the remaining five multibaggers – Bank Of Maharashtra, Central Bank Of India, UCO Bank, Indian Overseas Bank and Punjab & Sind Bank (PSB).
With a government shareholding of 98.25%, PSB has delivered an impressive 126% return over the past year. Similarly, Indian Overseas Bank, with a government shareholding of 96.38%, has witnessed a remarkable 160% return. Among all the 12 PSU banks, IOB is also the most expensive stock as it is valued at a price-to-book value of 4.73.
The story is similar for UCO Bank, Central Bank, and Bank of Maharashtra, all having significantly high government shareholdings.
A high promoter holding, in this case government holding, can lead to an artificial mismatch between demand and supply as fewer shares are available for the public to buy and sell.
Sebi rules, therefore, mandate all listed companies to have a minimum 25% public float but with some exceptions. PSU banks, for example, have been given time till August 2024 to meet the norms.
“It may opt for Follow-on Public Offers (FPOs), QIPs or offload some stake via ETF routes like the Bharat 22 ETF,” Yashovardhan Khemka of Abans Holdings said.
A potential increase in free float can, on one hand, create a supply overhang for share prices to march upwards, but on the other hand it can also allow more investors to recognize the strong fundamentals and value potential of these PSU bank stocks.
“As more shares become available for trading, liquidity increases, and a broader range of investors can access these stocks. This increased accessibility could lead to greater market efficiency and better price discovery, ensuring that the stocks trade closer to their fair value over the long term. Therefore, while low free float may have posed challenges in the past, increasing free float could unlock the full potential of these fundamentally strong stocks and benefit both investors and the companies alike,” Shreyansh V.Shah, Research Analyst, StoxBox, said.
Also read | PSU bank stocks ride past private sector peers in 2024, but how long will good days last?
Beyond the float factor
While a direct correlation between low free float and high share prices have been seen in many PSUs, the future trajectory of stock prices would also depend on valuations and growth outlook.
Since 2019, PSU banks have grown net revenues at a 17.8% CAGR versus private banks 14.9%, despite working from a larger revenue base. A massive and impressive turnaround has been seen in gross NPAs which has dropped from a peak of 14.6% to 3.7% in Q3, shows calculations done by Ambit Global.
Banks like Bank of Maharashtra, IOB, and UCO Bank have witnessed marked improvements in their GNPA levels over time, mainly due to declining slippages and improving recoveries.
Analysts say the significant discount relative to book value on a forward basis makes these banks more attractive to investors seeking value opportunities in the market.
“We believe that while the PSU rally has been sharp and the sector has seen significant re-rating, the stock valuations still look reasonable in context to business growth and profitability. PSU banks are well positioned to pursue healthy growth (given ample balance sheet liquidity) and maintain resilient margins as they benefit from residual MCLR repricing. The decline in bond-yields, along with continued improvement in credit cost (barring SBI), will support healthy profitability,” Motilal Oswal’s Nitin Aggarwal said.
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
