Public-sector unit stocks remain undervalued and a re-rating looks highly likely, said S Naren.
The CIO of ICICI Prudential AMC was discussing the impact of the lowering of the disinvestment target on PSUs, as part of a post-Budget panel hosted by Moneycontrol.
The discussions were on whether the government may have scaled down its plans after not being able to execute its earlier, more ambitious one. Also, if any further delay could have the government holding on to companies that aren’t competitive and losing an opportunity to sell in a bull market.
Naren didn’t seem too worried about the companies losing value.
“They remain undervalued, though a part of the undervaluation was corrected in the last 12 to 18 months,” he said.
The interest in value stocks and decent performance by the PSUs over the last few years will lead to their rerating, he said.
“There was a lot of interest in growth stocks till some point of time. But, today, across the world, you're seeing interest in value stocks making a comeback. (Therefore) many of the PSU stocks got re-rated over a period of time and a lot of further revaluation will happen as global yields go up. Over the last few years, any of these companies have actually seen decent performance. In the last six to seven years, many of them have not made serious capital allocation mistakes,” he said.
Private sector companies have faltered in and even have vacated sectors in which they had thought they could easily beat the PSUs, he pointed out.
“If you look at sectors such as power, for example, many of the private sector power companies did much more serious power-capital allocation mistakes than the public sector players. In fact, most of the private sector players have actually walked out of the sector. There are so many sectors where the private sector thought that it could make money very easily, but they bid wrongly and now they have exited the space, leaving the space for the public sector. So, I think there's a lot of opportunity and a lot of rerating is yet to happen,” he said.
“Recently, a Department of Investment and Public Asset Management (DIPAM) circular said that, if the government is coming out with any policy changes that could affect the stocks, they should think about it before they take any such decision… such are very, very positive for the re-rating of the sector,” he said.
The pricing of the PSUs is also attractive, he said. “Many of them are still available at very attractive dividend yields and low PE and compared to the market which trades at very high PE,” he said.
Here are some of the other takeaways from his talking points.
*Unique situation with “under-budgeted” revenue.
You've got under-budgeted revenue, maybe even under-budgeted some kinds of expenditure… its a unique situation. If the LIC IPO goes through, you'll have a much lower fiscal deficit than what has been budgeted by the government. So, I think it's a new government that is really trying to surpass what it is committing to in a budget. And that's a very different situation from where we used to have at one point of time,” he said.
* Asset allocation will be essential to make money this year.
“If you don't do active management, and if you don't do asset allocation, it will be very difficult to make money this year. That was a call we gave at the start of the year in December. And we continue to retain that view till the time the Fed settles and says that they are through with tightening, that they are now comfortable. Till that point of time, we will remain a big believer in both asset allocation and active management,” he said.
He said this is all more important since the “the global central bank bull market” ended in November 2021.
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