Select segments within PSU theme could outperform amid economic uptick

Public-sector banks, defence stocks could do well; PSUs exposed to commodities are at risk

PSU (public sector unit) thematic funds have given investors a category average return of 24.7 per cent year-to-date (YTD), compared to the Nifty 50 total return index’s (TRI) YTD 5.8 per cent. A large part of this performance has come over the past three months when the category rose 13.3 per cent on an average.

Riding the economic recovery

PSU stocks are largely present in the core sectors of the economy and are procyclical. “When an economic uptick happens, as is currently the case, they do well,” says Dhimant Kothari, fund manager, Invesco Mutual Fund.

He adds that if the economy continues to perform, PSU stocks will continue to do well.

Positive outlook for PSBs

Fund managers believe all the important levers of performance are in place for public sector banks (PSBs). “After the recent mergers, the number of PSBs has reduced. They are well capitalised and their balance sheets have become stronger,” says Kothari.

Credit growth was weak for four-five years. Hence, not much non-performing assets (NPAs) were created from the recent pool of loans. “The past NPAs have already been provided for,” says Kothari.

Corporate credit growth, where PSBs play a larger role, has turned around over the past year. “This growth has pumped up the earnings of PSBs,” says Vidya Bala, co-founder, Primeinvestor.in.
 

Defence stocks could outperform

Defence spending had taken a backseat during the pandemic. “Now, the focus is back on defence spending. The government is seriously pursuing Make in India, which is expected to boost the indigenous defence sector. Order books of defence companies have started growing,” says Kothari.

Participation in capex revival

PSUs could also gain from the capex cycle. “We are positive on domestic cyclicals and capex-related PSU names,” says Chintan Haria, head-product development and strategy, ICICI Prudential Mutual Fund.

The current demand-supply equation also favours power producers. “The plant load factor (PLF) of coal-based power plants is at a 10-year high,” says Kothari.

A proposed legislation could improve the power sector’s outlook. “The Electricity Amendment Bill, 2022, currently with a parliamentary standing committee, could improve power producers’ prospects,” says Gautam Kalia, senior vice president and head–super investors, Sharekhan by BNP Paribas.

PSU stocks are not grossly overvalued. “PSU names are in the fair value range and it would not be surprising if they continue to do well and get multiples, which typically a growth-oriented company enjoys, owing to the recent improvement in operational performance,” says Haria.

Select segments are at risk  

Avoid segments exposed to commodity stocks. “If inflation reverses and commodity prices fall, PSU stocks linked to natural resources could correct sharply,” says Vaibhav Porwal, co-founder, dezerv, a wealth-tech firm.

Changes in government regulations, which affect these companies in a big way, also pose a risk, he adds.

PSBs, too, could face a few challenges. “Interest rates have gone up. Small finance banks are willing to offer high interest rates to garner deposits. This will make it challenging for PSBs to gather low-cost deposits and maintain their net interest margins,” says Bala.

Some segments could be volatile. “Oil and gas could be volatile due to possible swings in crude prices and regulatory changes like the windfall tax,” says Kalia.

Invest selectively

Underperformance by some segments could pull down the future returns of the PSU theme. Experts say investors should focus on a narrower theme like PSBs. “Consider PSU bank funds if you don’t have adequate exposure to them through diversified-equity funds,” says Kalia.

Porwal suggests that instead of investing in a theme, which is bound to fall out of favour after a while, investors should opt for a strategy. “Invest in a value-oriented fund, which will also give you exposure to domestic manufacturing. But the fund manager will have greater room to maneuver and he won’t have to distinguish between public- and private-sector companies,” he says.  

Bala suggests investors who can do the research themselves should bet on the PSU theme through a few well-chosen stocks.