Mutual funds (MF) continued to load up on public sector company stocks in January, pushing many of them to record highs, even as the market stayed divided on valuations.
MF holdings in public sector firms scaled a record high of 7.58 percent of total assets under management in January, up from 5.72 percent a year ago and 7.24 percent last month. There were 769 schemes across 41 mutual funds investing in PSU stocks in January, compared to 692 schemes and 37 mutual funds a year ago. In January 2018, MFs invested in only 45 listed PSUs and the number has shot up to 71, according to Primedatabase data.
In 2024 so far, the BSE PSU index has rallied 18 percent, compared to a 1 percent gain in the Nifty. Last year, too, PSUs had outperformed the Nifty by a wide margin of 55.3 percent as against 20 percent.
The market value of MF holding in PSUs surged, exceeding Rs 4 lakh crore in January from Rs 2.33 lakh crore a year ago and Rs 3.7 lakh crore last month. In May 2020, amid the pandemic, the value of MF holdings in PSUs hit a low of Rs 1 lakh crore.
Top PSU picks for MFs include SBI, NTPC, Coal India, Power Grid, ONGC, Power Finance Corp, and REC. SBI leads with 105.88 crore shares worth Rs 67,814 crore, followed by NTPC with 179.14 crore shares valued at Rs 56,877 crore, and Coal India with 65.05 crore shares worth Rs 26,420 crore. Power Grid and ONGC also feature prominently, with MF holdings of 97.13 crore shares (Rs 25,187 crore) and 91.20 crore shares (Rs 23,000 crore), respectively.
Till a couple of years back, investors would shy away from PSU stocks because of the perception that creating value for shareholders was not the priority for the government. A sedated pace of growth in revenue too aided the sentiment. All that has changed of late. Increased capex spending by the government has helped boost the earnings of PSU companies in sectors like power, defence, engineering and railways. As for PSU banks, they look cheaper now compared to their private counterparts because of the improvement in asset quality.
The positive sentiment for PSU stocks is creating a virtuous cycle where rising prices are attracting more buyers and in turn pushing prices even higher.
Some broking firms like Kotak Institutional Equities have sounded a cautious note on PSU stocks saying that valuations were beginning to look expensive. But others like Jefferies are of the view that there is still steam left as the companies are likely to sustain their strong earnings growth for some more time. Elara Capital has advised caution due to high valuations but also said there was potential for short-term momentum because of the upcoming elections.
According to Jefferies, the rally in PSU stocks was due to EPS upgrades and RoE improvement. Despite outperformance, the PSU Index price earning multiple of at 12.1x is at a 40 percent discount to the Nifty, currently at 22.3x. Jefferies sees a 15 percent re-rating potential to average levels, and a shift in the government's stance towards 'value maximization' could further surpass the average.
“The PSU Index PE, though higher than pre-FY18, reflects a historical discount,” Jefferies said in its report, adding there was room for a rerating of multiples for PSU Banks, power, coal and utilities, and select oil and infra companies.
Market veteran Madhu Kela in a recent interview to Moneycontrol acknowledged some overvaluation in PSU stocks but stressed potential buying opportunities. Kela is bullish on PSU banks, citing improved governance and technology, diminishing credit cost concerns.
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