Is the PSU party just beginning? Where to look for the next leg of growth

India’s public sector undertakings (PSUs) have emerged as a compelling turnaround story in the post-Covid era. Backed by structural reforms, policy tailwinds, and prudent capital allocation, PSUs delivered a stellar 36% PAT CAGR over FY20–25—outperforming the private sector’s 26% CAGR—and drove a strong re-rating across the board. The BSE PSU Index posted a 32% CAGR over the same period, led by strength in BFSI, capital goods, and utilities.

FY25 marked a phase of earnings consolidation, with PSU profits declining 2% YoY due to a high base effect and weak oil & gas (O&G) sector performance. Excluding O&G, PSU earnings grew 16% YoY. PSU banks remained the dominant driver, with a 26% YoY profit increase driven by lower credit costs and improved asset quality. Notably, PSUs’ share in India Inc.’s total profit pool rose to 37.5% in FY25—up from 20% in FY20—highlighting their expanding relevance in India’s corporate earnings landscape.

Valuation multiples have moderated post the FY24 peak, with the BSE PSU Index trading at 11.7x forward P/E in June 2025—down from 13.8x in July 2024 but above the historical average of 9.9x. The sector’s ROE remains strong at 16%, and the contribution of loss-making PSUs to total profits has dropped to just 1%, down from 45% in FY18—signaling improved operational discipline.

Going forward, PSU earnings are expected to grow at a 10% CAGR over FY25–27, led by BFSI (53% of incremental profit), O&G (20%), and metals (12%). Renewed government capex, Make-in-India momentum, and strong order flows in defence and infrastructure remain key tailwinds.

BEL: Target Rs 410
Bharat Electronics (BEL) is poised for strong growth, backed by a robust INR 270 billion order pipeline and strong tailwinds from defence indigenization. The company expects 15% revenue growth in FY26, led by the execution of large orders such as QRSAM and next-gen corvettes, ensuring healthy revenue visibility through FY27.

Consistent R&D investments, enhanced localization, and a strong, debt-free balance sheet with INR 94 billion in cash enable margin resilience and room for capacity expansion. We expect revenue/PAT/EPS CAGR of 17%/16%/19% over FY25–27.

BEL was also among the top five gainers in PSU market cap rankings in FY25, reflecting investor conviction in the capital goods-led PSU growth theme.

HAL: Target Rs 5,650
HAL posted a resilient FY25 with 10% YoY PAT growth, supported by improved margins and normalization of provisions. Despite conservative 8–10% revenue growth guidance, HAL’s robust INR 1.8 trillion order book and resolution of engine supply issues for Tejas Mk1A aircraft support execution momentum. The company aims to deliver 12 LCA aircraft in FY26.

We model a revenue/PAT CAGR of 21%/14% over FY25–27, supported by stable EBITDA margins (~29%), strong cash flows, and manageable capex. HAL has also climbed to the 3rd spot among PSUs by market cap in Jun’25, highlighting sectoral leadership and sustained investor interest.

(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)


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