Motilal Oswal’s report notes that PSUs are no longer the underperforming segment they once were, having delivered strong earnings and market cap gains post-COVID. The BSE PSU Index has posted a 32% CAGR over FY20–25, significantly outpacing the 19% CAGR of the Nifty-50 in the same period.
The report emphasizes that while FY25 marked a period of moderation after the steep rally in FY24, several tailwinds remain intact.
“Despite FY25 moderation, many structural factors remain intact: strong earnings base, policy tailwinds, and improved balance sheets,” it said.
It further adds that long-term investors should selectively consider PSUs, “especially in BFSI, Capital Goods, and Infrastructure, based on earnings visibility and strategic importance.”
Top PSU stock picks
State Bank of India (SBI): The largest PSU bank with strong return ratios, SBI remains Motilal Oswal’s top pick in the BFSI space. The report notes a Return on Equity (RoE) of 18.6% for FY25, backed by healthy margins and credit growth.
Hindustan Aeronautics (HAL): A key beneficiary of the government’s Make-in-India push in defense, HAL is expected to deliver strong earnings growth with a 13.6% EPS CAGR over FY25–27.
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Bharat Electronics (BEL): With increasing defence capex, BEL continues to be a structural play in electronics and defence manufacturing, posting a robust 18.6% EPS CAGR for the projected period.
Power Grid Corporation: As a core infrastructure utility, Power Grid offers a defensive growth opportunity with steady RoE (projected 18.4% in FY26) and strong visibility on regulated earnings.
Coal India: Despite being in a cyclical sector, Coal India is favored for its cash flow strength and dividend yield, and is seen trading at attractive valuations with a P/E of just 6.8x for FY25.
PSU recovery story
The report traces the transformation of PSUs over the past decade. During FY15–20, PSUs lagged the broader market, and the BSE PSU Indexunderperformed with a negative CAGR of 3.8%. However, between FY20–25, PSUs staged a dramatic comeback with earnings growing at 36% CAGR, aided by a turnaround in public sector banks and strong performance in capital goods and infrastructure segments.
In particular, PSU banks turned profitable, moving from losses in FY20 to posting over Rs 2 trillion in profits in FY25, accounting for 38% of total PSU profits.
The report also notes a significant reduction in the PSU loss pool: “The contribution of loss-making companies to the overall profit pool has significantly diminished to just 1% in FY25 from 45% in FY18.”
Valuation and outlook
Valuations of PSUs have eased from their peaks. The BSE PSU Index P/E dropped from 13.8x in July 2024 to 11.7x in June 2025, though still above the low of 9.8x in February 2025. The current levels, the brokerage believes, reflect “continued earnings growth, supported by underlying RoE expansion, strong macroeconomic conditions, a favorable policy environment, a robust order book buildup, and a significant turnaround in governance and operational efficiency.”
Looking ahead, Motilal Oswal expects a 10% PAT CAGR over FY25–27 for its PSU coverage universe, which represents about 72% of India’s PSU market cap. The growth is expected to be led by BFSI (53% contribution), Oil & Gas (20%) and Metals (12%).
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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