PSU Banks Poised for Rerating: Real Estate Monetization Unlocks New Growth
Public sector banks are positioned for a significant rerating from current valuations of 1x book value to 1.5x book, driven by strong earnings growth and an unprecedented opportunity to monetize real estate holdings through REITs, according to Deepak Shenoy, Founder and CEO of Capitalmind. In an exclusive conversation with ET Now, Shenoy outlined how PSU banks can unlock tier I capital without government recapitalization, while also identifying semiconductors, high-tech manufacturing, and electrical transmission as compelling five-year structural growth stories.
Following the impressive performance of State Bank of India, Shenoy addressed whether investors should widen their public sector bank exposure beyond the largest player. He acknowledged that while the PSU banking pool contains some underperformers in terms of earnings, growth, and quality, consolidations over the past two years have strengthened balance sheets across top-tier and mid-tier banks.
With the new normal likely featuring lower net interest margins across the banking industry, PSU banks are actually positioned favorably compared to peers. Many trade at approximately 1x book value or even below, creating attractive entry points. Shenoy views the 1 to 1.5x book value range as the opportunity zone, especially for banks growing earnings at 12-20% annually—a combination that makes for very reasonable valuations.
Interestingly, he does not write off mid-level private sector banks or larger private banks either, noting that with credit growth returning to 15% levels, there is scope for good returns ahead despite unimpressive historical performance.
The rerating potential from current 1x book to 1.5x book hinges on two critical factors, according to Shenoy. First, banks must maintain growth without destroying quality—avoiding excessive provisioning layers or portfolio concentration in stressed areas. Second, and perhaps more revolutionary, is the budget provision allowing CPSEs (Central Public Sector Enterprises) to monetize owned properties through REITs.
Shenoy expects PSU banks to be included in this CPSE category, unlocking a massive opportunity. Many public sector banks purchased real estate 30, 40, or even more years ago, holding these assets at historical book prices on their balance sheets. The challenge is that revaluation of these properties does not help tier I capital meaningfully—only a portion contributes to regulatory capital requirements.
By formally divesting real estate into REITs, banks can convert these undervalued assets into tier I capital, funding growth without requiring government recapitalization. This represents a paradigm shift in how PSU banks can finance expansion while simultaneously unlocking hidden balance sheet value for shareholders.
Another positive development supporting the rerating thesis is the reduction in government ownership overhang. Shenoy noted that government stakes in most PSU banks have declined considerably and now sit below 75% based on recent data. This reduced overhang eliminates a historical concern for investors worried about future dilution from government stake sales. The combination of lower government ownership, potential real estate monetization, strong earnings growth, and attractive valuations creates what Shenoy characterizes as a compelling setup for PSU bank rerating in the coming period.
Addressing the corrections in capital goods and electronics manufacturing services sectors throughout last year, Shenoy emphasized that semiconductors within the EMS space offer strong longer-term prospects. He anticipates that potential trade deals with the US could reduce tariffs on goods and machinery, making inputs cheaper and facilitating greater domestic production capability. However, investors need appropriate time horizons. Much of the capex currently underway will only translate into revenues in 2027, making this fundamentally a longer-term investment thesis. Short-term revenues and order flows will drive near-term performance, but Shenoy stressed that the sector should only be evaluated from a five-year-plus perspective.
Looking five years out, he expects these companies to achieve multiples of their current revenues and profits, with margin improvement coming from better input cost management and scale-based leverage. While positive on the sector broadly, he cautioned that not all EMS players will succeed—selectivity matters even within this structural growth story.
Beyond semiconductors, Shenoy identified high-tech manufacturing in India as another compelling structural story. Budget changes and emerging trade deals will accelerate domestic manufacturing across multiple categories, creating opportunities in capex-oriented plays initially, followed by the manufacturing companies themselves. Areas including high-precision manufacturing tools and auto ancillaries should perform tremendously well over the next four to five years. Investors should seek companies trading at relatively low price-to-earnings-growth ratios while carefully evaluating their potential growth trajectories. The investment approach requires looking beyond current valuations to assess long-term positioning in India’s manufacturing transformation.
The electrical transmission ecosystem represents another area poised for substantial gains, according to Shenoy. This encompasses DC transmission, related components, product manufacturing for the ecosystem, and service providers supporting transmission infrastructure. Increased government focus on energy production will inevitably require corresponding investments in energy transmission and management infrastructure. Companies positioned across this value chain, whether manufacturing products or providing services, stand to benefit tremendously from this structural shift in energy policy and infrastructure development.
While acknowledging limited listed exposure currently available in the nuclear sector, Shenoy flagged this as an important area to monitor for future investment opportunities given India’s energy strategy. More immediately actionable is the rare earth strategy revealed in the budget. Though Shenoy would like to see more concrete announcements before committing capital, the tax holiday offered to this sector creates potential for high-yielding investments over a five to six-year horizon. The tax incentives should stimulate meaningful investment in rare earth production and processing, an area of strategic importance given global supply chain concerns.
A consistent thread throughout Shenoy’s analysis is the emphasis on appropriate time horizons for different investment themes. Short-term traders focusing on quarterly guidance and immediate revenue recognition will miss the fundamental transformation occurring across Indian manufacturing, infrastructure, and banking sectors. The opportunities he identifies—whether PSU bank rerating through real estate monetization, semiconductor capacity building, high-tech manufacturing expansion, or electrical transmission infrastructure—require five-year perspectives to fully materialize. Current valuations may not appear obviously cheap on near-term metrics, but patient capital deployed in quality companies within these structural themes can generate substantial returns as these multi-year trends unfold.
Key investment themes summary: - PSU banks : Trading at 1-1.5x book with 12-20% earnings growth; real estate monetization through REITs can unlock tier I capital without government recapitalization; rerating potential to 1.5x book; government stake overhang reduced below 75%. - Semiconductors/EMS : Five-year structural growth story; current capex translates to 2027 revenues; potential input cost benefits from US trade deals; margin expansion from scale leverage; requires patient capital, not short-term trading approach. - High-tech manufacturing : Budget changes and trade deals accelerating domestic production; capex plays initially, then manufacturers; includes precision manufacturing tools and auto ancillaries; seek low PEG ratios with strong growth potential. - Electrical transmission : DC transmission, components, product manufacturers, and service providers benefit from increased energy production focus; transmission and management infrastructure essential for energy strategy. - Rare earth : Tax holiday creates high-yield investment potential over 5-6 years; strategic importance given supply chain concerns; awaiting more concrete implementation announcements.
While much of the discussion focused on PSU banks, Shenoy made clear that he is not dismissing private sector banks. Mid-level private banks and some larger private banks offer scope for good returns as credit growth returns to healthy 15% levels. The key distinction is that historical performance may not look attractive, but forward-looking dynamics with recovering credit growth create opportunities across the banking spectrum. Investors should evaluate both public and private banks on growth quality, asset quality maintenance, and valuation rather than reflexively choosing one category over another.
