Low valuations, possible stake sales make PSU funds attractive

Investors could add PSU funds as a tactical play to their equity mutual fund portfolios, say fund managers. They believe low valuations, coupled with chances of a strategic sale or disinvestment in public sector units, could trigger a rerating for the sector.

“Valuations are cheap, most companies have good corporate governance, and possible disinvestment or strategic sale leaves room for value unlocking,” said Taher Badshah, chief investment officer, Invesco Mutual Fund. The government is in a strong position and there is better political will for disinvestment at this point of time, he said.

The S&P BSE PSU Index is trading at a price-earnings multiple of 10.11, an almost 20 per cent discount to its own 10-year average of 12.01, Badshah said. On price-to-book, it is trading at 0.81, compared with the 10-year average of 1.61.

In comparison, the broader S&P BSE Sensex index is trading at 22.68. The PSU index is trading at a 55 per cent discount to the latest Sensex level and a 38 per cent discount to the benchmark’s 10-year average.

On price-to-book, the Sensex is trading at 2.88. This translates into a 72 per cent discount for the PSU index at the current level and 45 per cent discount based on the 10-year average.

Many PSUs have been restructured in the last one decade. Some of these, such as IRCTC, Midhani, MSTC and RVNL, are unique businesses with a virtual monopoly, say analysts.


The balance sheets of state-run oil marketing companies have improved post deregulation in the sector. Also, PSUs, more recently, have begun to allocate capital more efficiently through buy-backs and dividend pay outs. Operating in cyclical sectors, PSUs have the potential to outperform in an economic recovery.

The government plans to sell its stake in Bharat Petroleum to a strategic buyer. It has initiated a bidding process to find out an asset valuer to estimate the fair value of the company. Also, media reports point to global and domestic logistic players showing interest in Container Corporation.

Fund managers point out that disinvestment or stake sale of PSUs was an event closely tracked by the market. “If the government demonstrates its capability in doing one or two such sales, the entire PSU pack could be rerated,” said Vinay Sharma of Nippon India Mutual Fund.

Financial planners said investors would be better off taking exposure in open-ended active PSU funds as compared to passive exchange-traded funds.

“Fund manager discretion can play a role in generating alpha here and hence better to go with an active fund,” said Rupesh Bhansali, the head of distribution at GEPL Capital. He recommended Invesco India PSU Equity Fund and SBI PSU Fund. Over the past one year, Invesco India PSU Equity Fund has given a return of 20.29 per cent, while SBI PSU Fund has returned 12.3 per cent. Bharat 22 ETF has returned 3.71 per cent, while CPSE ETF has lost 2.08 per cent.