The Value Comeback
How India's Most Hated Factor Became Its Best Performer - And Why PSUs Drove the Rally
February 2026 | Qode Advisors LLP
A Factor Left for Dead
For nearly two decades, value investing in India was a losing proposition. Between 2007 and 2020, investors who bought cheap stocks - those with low price-to-book, low price-to-earnings, and high dividend yields - consistently trailed the broader market and their growth-oriented peers., The Nifty50 Value 20, which selects the 20 cheapest blue-chip stocks from the Nifty 50, underperformed the broader Nifty 50 for most of the 2014-2020 period (NSE Indices). Globally, the story was the same: the Fama-French value factor experienced what researchers at Robeco called a "lost decade," with negative average returns from 2010 through 2019 (Blitz, 2020).
This wasn't just a cyclical dip. It felt structural. Fund managers stopped pitching value strategies. "Buy quality at any price" became the mantra. Asset-light, high-ROCE businesses - consumer staples, IT services, private-sector financials - attracted the lion's share of institutional capital.
Value sectors - public-sector banks, energy companies, commodities, capital goods - were considered uninvestable. PSU banks were drowning in bad loans. Oil companies were seen as government ATMs. Metal producers were at the mercy of global commodity cycles. These stocks traded at 0.3-0.5x book value, and nobody cared.
Why Growth Won: The Macro Regime That Killed Value
To understand why value failed, you need to understand what macro environment rewards growth and punishes value. Three forces dominated global and Indian markets from 2010 to 2020.
Ultra-Low Interest Rates and Abundant Liquidity
After the 2008 global financial crisis, central banks slashed rates to near zero and flooded markets with liquidity. In India, the RBI cut the repo rate from 8% in January 2014 to 4% by May 2020 (RBI Repo Rate History). Low interest rates disproportionately benefit growth stocks. When discount rates fall, the present value of far-future earnings rises sharply. Value stocks, deriving most of their worth from near-term earnings and dividends, see far less benefit.
The Rise of Asset-Light, High-ROCE Businesses
India’s market leadership during 2010-2020 was dominated by high return on capital employed, low capital intensity, and strong brand moats: HDFC Bank, Asian Paints, Hindustan Unilever, TCS, Infosys. These companies grew earnings without proportionally growing their balance sheets. HDFC Bank traded at 3.5-4x book for years. Asian Paints commanded P/E of 60-80x. Investors willingly paid these premiums for predictable free cash flows.
The NPA Crisis: Value’s Graveyard
The single biggest reason value underperformed in India was the public-sector banking crisis. Between 2015 and 2018, the RBI’s Asset Quality Review forced banks to transparently recognise hidden non-performing assets. The gross NPA ratio of public-sector banks surged from 4.97% in March 2015 to a peak of 14.58% in March 2018 (PIB, Dec 2024).
CHART 2: PSU Bank Gross NPA Ratio - The Great Clean-Up (2015-2025)
PSU banks collectively posted net losses for multiple consecutive years record aggregate losses of Rs 85,390 crore in FY18 alone (Business Standard). The government infused an unprecedented Rs 3,10,997 crore to recapitalise PSBs during FY17 to FY21 (Business Standard). For any investor running a value screen, PSU banks appeared as the cheapest stocks and buying them was catastrophic.
This single sector – PSU banking – effectively broke the value factor in India for a decade. Any index or strategy that systematically bought cheap stocks was forced to overweight these banks. And the banks kept falling.
What Changed After 2020: The Great Value Reversal
Then, almost without warning, everything reversed. Starting in late 2020 and accelerating through 2021-2024, value stocks - particularly those in the PSU and cyclical universe - began one of the most dramatic outperformance runs in Indian market history.
The Nifty PSE Index, which had delivered near-zero returns for the prior six years, generated a CAGR of approximately 30-35% between March 2021 and September 2024. The BSE PSU Index roughly tripled from its March 2020 lows. The Nifty CPSE Index surged over 200% from the COVID-19 trough to its 2024 peak (NSE Indices).
Sources: PIB (Dec 2024), PIB (2025), Business Standard (May 2025), DD News, NSE Indices, Union Budget documents.
This wasn't random mean-reversion. Several structural forces converged simultaneously.
1. The Government Capex Supercycle
The single most consequential shift was the massive increase in capital expenditure. Between FY2020 and FY2025, central government capex grew at a compound annual rate of roughly 24-27%. In absolute terms, it surged from around Rs 3.4 lakh crore in FY20 to Rs 11.11 lakh crore budgeted for FY25 (revised estimate: Rs 10.18 lakh crore) (Union Budget at a Glance; PIB). As a share of GDP, capex rose from 1.7% in FY20 to a peak of 3.2% in FY24, before moderating to 3.1% in FY25 (Economic Survey 2025-26, IBEF). The FY27 budget continues this thrust at Rs 12.2 lakh crore, an 11.5% increase (PRS India).
CHART 3: India's Government Capex Supercycle (FY16-FY26)
This spending was targeted at roads, railways, defence, power generation and transmission - precisely the sectors where PSUs and value stocks dominate. When the government builds highways, Power Grid and L&T benefit. When it orders defence equipment, HAL and BEL benefit. When it expands railways, IRFC and RVNL benefit. The capex push created real earnings visibility for companies starved of orders for years.
2. The PSU Bank Clean-Up: From Broken to Brilliant
The government's "4R's Strategy" - Recognition, Resolution, Recapitalisation, and Reform - delivered results few predicted. The gross NPA ratio of PSU banks declined from the peak of 14.58% in March 2018 to just 2.58% by March 2025, and further to 2.50% by September 2025 (PIB, Dec 2024; PIB, 2025; PSU Connect). In FY2023-24, PSU banks collectively recorded their highest-ever aggregate net profit of Rs 1.41 lakh crore (PIB), which then surged to a new record of Rs 1.78 lakh crore in FY25, a 26% year-on-year increase (Business Standard).
Their capital adequacy ratio (CRAR) improved by 393 basis points to 15.43% as of Sep-24 (PIB). Return on equity at major PSU banks like SBI and Bank of Baroda exceeded 17-20% (DD News). Over three years (FY22-FY24), PSBs paid a total dividend of Rs 61,964 crore (PIB).
3. Low Starting Valuations: The Coiled Spring
At the pandemic's depths in March 2020, many PSU and value stocks traded at historically extreme discounts. PSU banks at 0.3-0.5x book. Oil marketing companies at single-digit P/E ratios. Defence majors like HAL and BEL at P/E ratios of 10-15x - companies that subsequently re-rated to 30-50x as earnings and order books surged.
This is critical: the magnitude of value's outperformance was as much about where these stocks started as where they ended. When you buy at 0.3x book and it re-rates to 1.5x book, you've made 5x before earnings even grow. When earnings double on top, the compounding is extraordinary.
4. Improved PSU Governance and Capital Discipline
Higher dividend payout requirements, board-level professionalisation, performance-linked targets, and increased autonomy (Maharatna, Navratna, Miniratna classifications) improved capital allocation. NTPC invested aggressively in renewable energy. BEL diversified beyond traditional defence. Coal India maintained capital discipline despite record profits. Power Grid expanded transmission while maintaining dividend records.
5. The Commodity and Energy Cycle
The post-COVID recovery, supply-chain disruptions, and the Russia-Ukraine conflict triggered a commodity supercycle. Oil, gas, coal, metals, and steel saw multi-year price increases. Indian commodity companies - dominating the value universe - reported record profits. Coal India, ONGC, BPCL, Tata Steel, Hindalco, and Vedanta all delivered record or near-record results during FY22-FY24.
The Hidden Engine: How PSUs Drove Value's Returns
Here's the insight most analyses miss: India's value factor revival was not a classic, broad-based value rotation. It was disproportionately driven by the re-rating of public-sector enterprises. When you decompose the holdings of Indian value indices, PSU dominance is striking. The Nifty500 Value 50 index includes companies like Tata Steel, ONGC, Vedanta, Hindalco, Power Grid, and Coal India among its top holdings (NSE Indices factsheets). The BSE PSU Index and Nifty CPSE Index overlap substantially with the value universe. If you were buying "value" in India between 2021 and 2024, you were overwhelmingly buying PSUs and cyclicals.
CHART 4: Anatomy of India's Value Factor Rally - Decomposition
This concentration creates both opportunity and risk. The opportunity: PSUs were structurally undervalued due to governance concerns, NPA fears, and capital allocation scepticism. When those concerns were addressed, the re-rating was enormous.
The risk: if a significant portion of value's return was driven by a one-time re-rating of PSU governance and balance sheets, can that outperformance be sustained? Re-rating is a one-time event. Once PSU banks trade at 1.5x book instead of 0.3x, the tailwind disappears. Future returns depend on earnings growth alone.
Decomposing the Return: Re-Rating vs. Earnings Growth
Total stock return decomposes into three components: earnings growth, P/E re-rating, and dividends. For Indian value stocks between 2021 and 2024:
Illustrative decomposition based on aggregate PSU and value index data.
Roughly half the total return came from multiple expansion - the market assigning higher valuations to the same level of earnings. A PSU bank that traded at 0.4x book in 2020 and 1.5x book in 2024 saw its stock price nearly quadruple from re-rating alone, before accounting for the doubling of book value from improved profitability. The turnaround from record losses of Rs 85,390 crore in FY18 to record profits of Rs 1.78 lakh crore in FY25 (Business Standard) shows the scale of the earnings transformation.
The other half came from genuine earnings improvement. PSU bank profits surged as NPAs fell. Defence companies saw order books triple. Power companies benefited from capacity additions. This earnings growth component is more sustainable - but requires the capex cycle and policy support to continue.
The Cyclical Question: Will Value Keep Winning?
Factor leadership is inherently cyclical. Value does not win in all environments. Growth does not win in all environments. The macro regime determines which factor dominates (MSCI Factor Research; Research Affiliates).
Framework based on MSCI Factor research, AQR analysis, historical patterns.
India is currently in a capex-led, real-economy expansion phase. The government is spending heavily on infrastructure, defence, and energy transition. Banks are well-capitalised and lending. Manufacturing is promoted through PLI schemes. This regime historically favours value.
But it won't last forever. Several risks could shift the balance back toward growth:
Government capex realization has underwhelmed: FY25 revised estimates came in at Rs 10.18 lakh crore vs the original budget of Rs 11.11 lakh crore - an 8.4% undershoot (PRS India). While the FY27 budget maintains momentum at Rs 12.2 lakh crore (Invest India), capex as a share of GDP has plateaued at ~3.1%, down from the FY24 peak of 3.2%.
- PSU valuations are no longer cheap. Many PSU stocks have moved from deep value to fair value or overvalued territory. The easy re-rating money has been made.
Global rate cuts could once again favour long-duration growth assets. The RBI has already cut the repo rate by 125 bps in 2025, bringing it to 5.25% (Trading Economics). If easing continues, the growth factor could reassert dominance.
- Commodity cycles are inherently mean-reverting. Energy and metals prices that boosted value stock earnings in 2021-2023 have already partially normalised.
What This Means for Investors
The value factor's resurgence is not a permanent shift. It's a reflection of a specific macro phase - infrastructure spending, PSU reform, balance-sheet repair, and commodity tailwinds. Real, fundamental changes, not just noise.
Don't Extrapolate the Re-Rating
The biggest portion of value's excess return came from multiple expansion. PSU banks going from 0.4x to 1.5x book was a one-time repricing of risk. Expecting another 3-4x from re-rating alone would be unrealistic. Future returns need earnings compounding.
Factor Leadership Is Cyclical, Not Permanent
The same researchers who declared value dead in 2019 now talk about a permanent value renaissance. History suggests otherwise. The growth factor underperformed for years after the 2000 tech bubble, then dominated post-2010. Value's recent outperformance follows the same cyclical pattern.
Multi-Factor Approaches Survive Regime Changes
The lesson isn't to bet exclusively on value or growth. Build portfolios capturing multiple return drivers - value, momentum, quality, low volatility - so performance doesn't depend on one factor's regime persisting. Systematic allocation across factors, grounded in data rather than narratives, is how investors benefit from value's resurgence without being destroyed when the cycle inevitably turns.
The Bottom Line
Value spent nearly two decades in the wilderness in India. Its underperformance was driven by a macro regime rewarding asset-light growth, a banking crisis making cheap stocks toxic, and abundant global liquidity inflating growth multiples.
What changed after 2020 was structural: a government-led capex supercycle, comprehensive PSU bank clean-up, improved governance and capital discipline at public-sector enterprises, and commodity tailwinds. The resulting re-rating was dramatic - and largely driven by PSU stocks, making this as much a PSU renaissance story as a classic value cycle.
But factor leadership doesn't last forever. The capex cycle will moderate. Valuations have normalised. The next regime could look very different.
The investors who will build lasting wealth are not those who chase the winning factor of the last cycle. They are the ones who build frameworks that capture factor premia across cycles - systematically, without emotion, and grounded in data.
The value factor is back. The question is whether your portfolio is built to capture what comes next, regardless of which factor leads.
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