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Why are mutual funds loading up on stocks of public sector companies?

The government's disinvestment drive, focus on infrastructure and reasonable valuations have made PSU stocks attractive

March 10, 2021 / 11:55 AM IST

Equity mutual funds (MFs) have been increasing their allocation to PSU (public sector undertakings) stocks in their bid to own a piece in segments that are back in market favour. These PSU stocks also offer investment opportunities at reasonable valuations.

Fund managers have significantly enhanced their allocations to PSU bank stocks, especially the large ones, in the last three months. They have bought more shares of State Bank of India, Canara Bank, Bank of Baroda, Punjab National Bank between November 2020 and January 2021, data with ACEMF showed. Equity MF holdings in PSU banks have increased 0.6 percent point since September and now accounts for 2.6 percent of their overall portfolio.

Similarly, they have added shares of PSU financial services firms to their portfolios during the timeframe. Fund managers have ramped up their exposure to SBI Cards and Payment Services, UTI Asset Management and Housing and Urban Development Corporation. Equity MFs have boosted their holdings in several PSU stocks across sectors, ACEMF data showed.

Incidentally, shares of PSUs have been on a roll on the bourses with the BSE PSU index hitting a 16-month high during intra-day on March 2. The index rallied 22.5 percent in February, its biggest monthly gain in nearly seven years.

The PE (price-earnings) ratio of the BSE PSU index, a key measure of how stocks in the basket are valued, is still at only around 10, the lowest in nearly seven years, BSE data showed. In contrast, the PE ratio of the Sensex is at 27.70 and that of the Nifty is hovering around 41, much higher than the multiples of these indices during the preceding years.

Budget focus on infrastructure and disinvestment

“PSUs offer good value as they have been laggards in the (stock market) rally. The government’s talk on strategic stake sales (in select PSUs) and monetization of assets has created a positive sentiment around PSUs,” says Mahesh Patil, chief investment officer (CIO), equities, Aditya Birla Sun Life MF.

“The domestic economy is recovering. Most PSUs are linked to the core of the economy,” he says. “Since the outlook on PSUs is positive, fund houses have added a few quality names to their portfolios,” Patil says.  “After the budget announcement, there is a certain increase in interest on PSUs because of the government’s commitment to capex (capital expenditure), economic growth projections and disinvestment,” says Nimesh Chandan, head of investments, Canara Robeco MF.

Schemes such as HDFC Flexi Cap (formerly HDFC Equity Fund) and HDFC Top 100 that had invested in such state-owned enterprises, benefited from the turn in market sentiment. HDFC Flexi Cap gave 45 percent return in the past six months, as against the category average of 32.76 percent, as per Valueresearch. HDFC Top 100 gave 37.72 percent return in the same period; the large-cap category managed 31.92 percent return. To be sure, these are diversified equity funds, but their focus on state-owned firms and cyclical stocks has now paid off, after years of sober performance.

Attractive valuations

“As the economy is opening up, we are seeing a revival in a lot of businesses. The market is looking at value stocks as the economic upcycle is coming back,” he says. “There are pockets of value in the overall space (PSUs),” Chandan says.

“A lot of PSUs were undervalued and have started moving up in the current rally,” says S Krishnakumar, CIO, equities, Sundaram MF.

“Many PSUs are in cyclical businesses and are capital intensive.  Cyclicals are doing well in the last six months,” he says.

With the government showing interest in getting out of PSUs and focusing only on certain strategic sectors, stocks in the space have gained traction, say fund managers.

When there is disinvestment, typically, markets identify 3-4 serious contenders for disinvestment. And their share prices rise, Krishnakumar says.

Increase in government spending and recovery in commodity prices are benefiting PSUs. All these factors are driving the interest in PSU stocks, say fund managers.

Should you invest in PSU-focused funds?

This year, the government has set itself a major target on building India’s infrastructure. Disinvestment has also got attention, as the government has made its intention clear of exiting some of the companies and businesses. Quite naturally, schemes that focused on cyclical stocks have seen a pick-up in their performances after being laggards for many years. Stick to diversified funds. Go for thematic schemes such as PSU equity or PSU bank funds only if you understand the risk and increased volatility that can come with them.

Allirajan M is a freelancer
first published: Mar 10, 2021 09:35 am