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A $62-billion fund house is betting big on market’s most underappreciated pocket

Mittul Kalawadia, who will manage ICICI Prudential MF’s recently-launched PSU equity fund, says investors could make ‘meaningful gains’ as the business cycle improves in many sectors in which PSUs are dominant players. He also sees power sector stocks doing well.

Mumbai / September 02, 2022 / 04:51 PM IST
Mittul Kalawadia.

Mittul Kalawadia.

ICICI Prudential Mutual Fund, India’s second-largest mutual fund house managing assets worth over $62 billion, is convinced investors not participating in the ongoing rally in state-owned companies are missing out on a big opportunity.

The Nifty PSE index, a gauge comprising 20 state-owned enterprises, has risen nearly 10 percent so far this year compared to barely 1.2 percent gains for the benchmark Nifty 50.

“The underperformance of the last four or five years has created such negativity that the consensus view is that PSUs (public sector undertakings) can never make money,” Mittul Kalawadia, who will manage ICICI Prudential MF’s recently-launched PSU equity fund told Moneycontrol in a virtual interview.

The mutual fund has made a new fund offering (NFO) to investors for a PSU Equity Fund which concluded on September 6.

Kalawadia believes investors, in general, are taking a myopic view of state-owned companies based on their underperformance in the past decade, while forgetting that in the first decade of the century the space was a rank outperformer in the market.

“Given that the gap between the current price and intrinsic value of many of the PSU names is high, we believe investors stand to make meaningful gains as the business cycle is improving in many of the sectors in which PSUs are dominant players,” Kalawadia, who is a senior fund manager at ICICI Prudential MF, said.

Between 2001 and 2011, the PSU index had given more than two times the return of the benchmark Nifty 50 index, driven by a robust infrastructure cycle in that period. The 2000s are known to many market veterans as the country’s “golden period” that saw a global commodity boom and rapid infra development.

A similar period may be developing in the domestic economy after the pain inflicted by the COVID-19 pandemic, the fund manager said. Kalawadia believes green shoots are already visible of a new capex cycle while the improving health of the country’s state-owned banks sets the stage for robust credit growth.

The gross non-performing assets ratio of the banking sector has plummeted to a six-year low of 5.9 percent as of March 2022, according to the Reserve Bank of India’s (RBI) Financial Stability Report released in June. The gross bad loans ratio of state-owned banks has also fallen to 7.6 percent of total assets in March 2022 from nearly 10 percent in September 2020, the RBI report showed.

“We believe a cycle similar to that of early 2000s is likely to play out again wherein the business cycle of banks improved as the economy gathered momentum,” Kalawadia said.

Another sector where Kalawadia sees strong opportunity is the chronically-ailing power sector. The fund manager argued that India is re-entering an era of peak power deficit due to under-investment in power generation capacity in the past decade.

“As the deficit between power demand and power supply widens, the sector’s profitability stands to improve over the next two to three years,” Kalawadia said.

Kalawadia is of the view that as the business cycle of the Indian economy takes a turn for the better the ongoing discount at which many PSU stocks are trading to their private peers could start to vanish.

“It is very likely many of the PSU companies could gain some of their lost ground,” Kalawadia argued.

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Chiranjivi Chakraborty
first published: Sep 2, 2022 04:51 pm