Equity mutual funds focused on PSUs could turn the corner, but factor in risks: Advisers

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Mutual fund investors looking for a theme that has been ignored for a while but whose prospects are still sound could consider schemes that bet on Public Sector Undertakings (PSUs). Fund managers said as valuations across the market turn rich, shares of PSUs, which have been battered in recent years, could turn into safe-haven investments.

“Most PSUs have strong balance sheets, attractive returns on equity (RoEs) in their respective industries. Many of them operate in regulated sectors with low earnings risk,” said Mahesh Patil, Co-CIO, Aditya Birla Sun Life Mutual Fund. He said these companies could witness steady earnings growth over the next 4-5 years, presenting a strong thematic investment opportunity.

Investors have shunned PSU funds and stocks in the past three years as they have been caught in a downward spiral. Continuous selling of PSU stocks by the government to meet its disinvestment target and the absence of strong earnings growth compared to their private rivals have weighed on these stocks.

The S&P BSE PSU index lost 35% over the last year when the S&P BSE Sensex was flat. But, the underperformance has brought their valuations to the lowest in the past 10 years. The S&P BSE PSU index trades at a price-to-earnings (PE) ratio — a key valuation measure — of 9.75 times, the lowest in a decade and 65% discount to the benchmark S&P BSE, which is trading at 28 times. The dividend yield of the PSU index is 3.75%, while that of the Sensex is 1.01%.

With the government looking for disinvestment through strategic sales and not through the ETF route, fund managers believe the supply overhang should vanish. With companies like HPCL and NTPC announcing buybacks, there is hope among fund managers that a rerating of PSU shares could be around the corner.

Given the uncertainties associated with such a theme, many investment advisers recommend only a modest allocation to it.

“Sophisticated investors who understand the risks associated with such themes can make a small investment to the fund,” said Rupesh Bhansali, head-distribution, GEPL Capital. He recommends Invesco PSU fund and Aditya Birla SL PSU Fund.

Some do not recommend them at all to investors.

“Inefficiencies of PSUs are well known and they have disappointed investors over the last decade. Since such funds have a very narrow mandate and investors will be better off with diversified equity funds where the fund manager is free to pick up a PSU stock if there is merit,” says Harshvardhan Roongta, CFP, Roongta Securities.