What fund managers think of the current PSU rally

Dynacons Systems and Solutions is a 27-year-old IT company with global perspectives, with its headquarters in Mumbai.  (Pixabay)
Dynacons Systems and Solutions is a 27-year-old IT company with global perspectives, with its headquarters in Mumbai. (Pixabay)

Summary

Insights from four fund managers on the underlying PSU sector dynamics and trends

Public sector undertakings (PSUs) offer investors the opportunity to diversify and manage risk, even as they continue to present potential for capital appreciation. Here is what some fund managers think about the sector and its current rally:

 

PSU Index overview
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PSU Index overview

PSU growth story is beyond ownership metrics

Souvik Saha, investment strategist, DSP AMC

 

“We firmly advocate assessing companies based on their structural growth trajectory, regardless of their public or private ownership. It’s imperative to recognize the significant growth narrative and competitive advantage present in key sectors where PSUs operate. Overcoming historical challenges like government interference, we have observed a notable shift in management objectives and reduced governmental involvement, enabling PSUs to operate more effectively within their respective sectors. It’s crucial to evaluate each company beyond stock prices and profitability metrics, focusing on the structural story contributing to PSU growth.

It is important for investors to emphasise the significance of effective management and alignment with business expectations in determining a company’s valuation, irrespective of its ownership structure. Notable improvements in metrics like return on equity (ROE) and return on capital employed (ROCE) reflect improving fundamentals, and we anticipate continued earnings growth. A sustained rally in PSU stocks, driven by structural growth and favourable government policies, is foreseeable, provided budgets and policies remain aligned with the PSU narrative. Investors need to evaluate each company based on performance and alignment with business objectives.

Embracing more growth in PSUs

Mahesh Patil, CIO, ABSL AMC

 

Trends like the resurgence of PSU banks from NPL cycles and the profitability enhancement in oil marketing companies (OMCs )due to oil price stabilization are promising. Additionally, emerging themes like defence and railways, propelled by governmental initiatives such as ‘Make in India’ are expected to fuel growth in the PSU segment. I acknowledge the cyclical nature of commodities like steel and natural resources, suggesting potential for recovery after a period of underperformance. While OMCs have shown recent strength, I see tactical opportunities amid challenges like time correction. Despite recent price momentum, investors should recognize that growth rates may not match historical speeds. ABSL’s strategic viewpoint towards PSUs stresses the enduring potential of these entities in contributing to corporate profit shares. Overall, my analysis highlights the dynamic nature of the PSU sector, urging investors to navigate market volatility with a focus on long-term value creation.

The PSU cycle is here to stay

Gaurav Kochar, fund Manager, Mirae Asset Mutual Fund

 

Looking at the significant improvements and emerging opportunities within various PSU segments. I acknowledge the challenges faced by PSU banks over the past decade, particularly with regards to non-performing assets (NPAs). However, I note a positive shift in recent years, with PSU banks successfully undertaking clean-up activities, resulting in improved capitalization levels and a significant reduction in gross NPAs at the industry level. This turnaround has propelled PSU banks from loss-making entities to reporting record high profits, accompanied by notable enhancements in ROE. Valuations across PSU sectors, excluding banks, had remained attractively low for an extended period, presenting significant investment opportunities. I would like to highlight the significant capex in sectors like power, railway infrastructure, and defence, with ongoing capacity additions and new project commencements. These sectors are experiencing robust growth trajectories, supported by government initiatives such as production-linked incentives (PLI), Make in India, and a broader manufacturing push.

Reflecting on the cyclical nature of the PSU sector, we must notice the ongoing phase of capacity addition, a critical component of an 8 to 10-year cycle. While acknowledging the possibility of temporary corrections, I remain optimistic about the sustained momentum of the PSU rally, particularly if underlying profitability trends continue positively. I foresee further capacity additions in the future, though not on the scale witnessed in previous years, supported by continued earnings growth and a robust support system.

Opportunity: The evolving narrative of PSUs

Richard Dsouza, fund Manager, SBI AMC

 

It’s crucial to contextualise the present situation by revisiting historical PSU cycles, particularly highlighting the remarkable performance during the 2002-07 period, where the PSU index delivered a robust 44% compound annual growth rate (CAGR) according to Bloomberg. Drawing parallels to the current cycle, which commenced in 2021 and has yielded similar returns, I identify a trend shift underway, suggesting the potential for several more years of the rally. The transformative changes within the PSU landscape underscore the government’s proactive stance in fostering PSU growth through strategic policy interventions. Notable improvements in earnings and order books of the PSUs, particularly evident in sectors such as defence and railways, where order book expansions foreshadow promising profitability and margin enhancements over time. Acknowledging the likelihood of temporary corrections, I maintain confidence in the sustained momentum of the PSU rally.

I underscore the intrinsic value proposition of PSUs, characterised by single-digit price-to-earnings ratios, resurging growth prospects, and attractive dividend yields. Advocating for a value investing approach, I emphasise the importance of long-term value amid short-term fluctuations. Investors need to recognize the evolving narrative of PSUs in the context of India’s dynamic market landscape, positioning PSUs as a compelling investment opportunity poised for sustained growth.

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