PSU MFs: Value creators or destroyers?

1 Jun 2023 , 03:47 AM

To invest in Public Sector Undertakings (PSUs) or not – has remained a million-dollar question since time immemorial. As is not usually the case, the arguments backing either side are valid; making this a tough decision for investors. So how do we resolve this dilemma? We look at data, and facts. 

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Fact: Divestment is alive

First up, a key concern of investors has been the lack of freedom PSU companies’ bank boards and managements have while making strategic decisions. There have been instances where these corporations have to live with government decisions aimed at welfare of the public at large, eating into the company’s own profitability. However, PM Narendra Modi’s view on this topic is rather straightforward. “Government has no business to be in business, government focus should be on public welfare”, he had said in a webinar on privatization back in 2021. He has been persistent with the disinvestment agenda, notwithstanding the slower-pace of execution so far.

Fact: PSUs hold immense untapped potential

Corporates too, echo this belief. Back in 2018, Anil Agarwal, Chairman of Vedanta Resources, had said in an interview to Economic Times, “Giving a free hand to public sector enterprises and district collectors will be a singular move that can pole-vault India into the top 50 in the World Bank’s Ease of Doing Business ranking.” He went ahead to even state that if PSUs flourish, at least $100 billion worth of India’s imports can be reduced. 

Now, let us deep dive into some data. Here, we are considering mutual fund schemes focused dedicatedly on PSU stocks. PSU mutual funds were the top-performers across all mutual funds during December 2021 and December 2022. 

The four major schemes focused on this theme also performed fairly well, though they lagged the benchmark marginally. This is commendable, when viewed in context of rising cost pressures faced by mutual funds amid tightening regulations. 

Scheme Name	AUM (Rs. Cr.)	Absolute (%)
Latest NAV (Rs.)	1M	3M	6M
Aditya Birla SL PSU Equity Fund-Reg (G)	1,083	17.720	6.55	7.20	5.41
ICICI Pru PSU Equity Fund-Reg (G)	1,411	11.160	7.20	8.98	6.18
SBI PSU Fund-Reg (G)	521	16.232	7.10	6.85	2.23
Invesco India PSU Equity Fund (G)	432	32.250	7.21	8.59	3.07
S&P BSE PSU – TRI	16,389*	—	8.72	9.58	7.46

Above data is as on May 8, 2023

^*Latest value

In terms of CAGR growth, these schemes have given handsome returns to investors, consistently.

Scheme Name	AUM (Rs. Cr.)	Latest NAV (Rs.)	CAGR (%)
1 yr	3 yrs	5 yrs	7 yrs	10 yrs	Since inception
Aditya Birla SL PSU Equity Fund-Reg(G)	1,083	17.720	19.05	33.79	–	–	–	–
ICICI Pru PSU Equity Fund-Reg(G)	1,411	11.160	–	–	–	–	–	–
SBI PSU Fund-Reg(G)	521	16.232	21.45	29.09	7.51	10.19	7.33	3.84
Invesco India PSU Equity Fund(G)	432	32.250	21.98	26.64	11.93	12.49	14.01	9.08
S&P BSE PSU – TRI	16,389*	–	22.73	39.03	9.78	11.75	7.85	–

Above data is as on May 8, 2023

^*Latest value

Having said that, it is to be noted that this strength has come on a low base of underperformance. Between December 2020 and December 2021, PSU MF schemes gave 33% returns as compared to 47% returns given by the benchmark.

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Sector-wise portfolio holding

If we look at the portfolio of these four schemes, all of them have parked most of their money in Banks and Power companies.

Aditya Birla SL PSU Equity Fund-Reg(G)
Banks	27.85%
Power	18.70%
Mining	11.30%

 

ICICI Pru PSU Equity Fund-Reg(G)
Banks	26.89%
Power	23.70%
Crude Oil	14.33%

 

Invesco India PSU Equity Fund(G)
Banks	24.89%
Power	19.30%
Capital Goods	17.32%

 

SBI PSU Fund-Reg(G)
Banks	36.11%
Power	13.90%
Crude Oil	7.99%

 

This is not surprising given that both these sectors have undergone significant reforms in the past couple of years. From cleaning up the asset quality of PSU Banks, improved profitability, potential privatization of PSU banks to continued government push for the power sector; all these reforms have cumulatively enhanced investor interest in banks and power companies.

Besides Banks and Power, PSU MF schemes are invested in capital goods, metals & mining, logistics, oil & gas, insurance and realty sectors. Prospects of all these sectors are closely tied with that of the Indian economy. As per the second advanced projections of the NSO, Indian economy is likely to grow by 7.0% in FY23 and 6.0% in FY24. It will remain one of the fastest growing major economies around the world. This will augur well for PSU companies. Historically, PSUs have been paying high dividends. All in all, investors can consider PSU stocks and/or PSU mutual funds to reign the benefits of capital appreciation as well as consistent dividend income.

Presence of several triggers

Multiple triggers are in place for a rally in the PSU stocks from here on. Most of the businesses are in a monopolistic/leadership position in their respective sectors. Thus, they are well placed to capitalize on the economic recovery. Candidates for disinvestment could witness significant upcycle once the process starts. Post disinvestment, most PSUs are likely to witness a healthy turnaround in their business and could also adopt enhanced governance practices. 

Any delay in divestment process, slower-than-expected economic recovery and high competitive intensity from private players are key downside risks.

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Author of this article is Sheetal Agarwal, AVP- Content and Communication, IIFL