Share prices of State-owned companies may see a sharp rally over the next three to five years if the Modi government initiates "structural reforms" in Public Sector Undertakings (PSUs) similar to those he implemented when he was the Chief Minister of Gujarat, according to a report by a global brokerage firm.

Currently, the stock prices of PSUs are undervalued by nearly 30 percent due to several issues such as "lack of autonomy and political interference", Morgan Stanley said in a note to The Economic Times.

"If the Modi government engineers change, as his performance with Gujarat enterprises points to, these stocks could be surprising winners in the coming three to five years," the firm said.

During the Modi's tenure as Gujarat chief minister, "the return on equity" of leading Gujarat State enterprises increased by nearly 30 percent in ten years.

Morgan Stanley said stock prices of PSUs such as Coal India, PowerGrid, BPCL, NTPC and ONGC, could see a similar rally if PM Modi brings in more reforms in the companies.

A significant turnaround seen in the "performance of Coal India and upstream energy companies" suggests that Modi's Gujarat model could be replicated in companies run by the Central government.

The report said the PSU stocks have underperformed the broader market by 55 percent in the past decade. It also said that foreign investors' stake in PSU stocks has been reduced to half since 2007.

In contrast, it was reported that the stock prices of six of the seven listed Gujarat public sector companies had witnessed a sharp fall after Modi stepped down as Chief Minister of the state to become the Prime Minister of India.

A few Gujarat industrialists had said that the declining share prices indicated a fall in the confidence of industry in the current administration.

"Things have changed since the change of guard in Gujarat. Businessmen are not as confident as they were during the Modi's rule," a State industrialist had said.

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