Smartinvestor Special: PSU stocks as an investment theme

J Venkatesan, Fund Manager, Sundaram BNP Paribas MF spoke with Jitendra Gupta about PSU stocks as an investment theme.

Why do you think that PSU stocks can be an investment theme?

PSUs as an asset class would be a good investment theme for several reasons. Firstly, this asset class currently has good valuation gap as compared to private sector peers.  While we think this valuation gap may not get bridged completely, it will narrow as the operational parameters of PSU companies have improved significantly over the years. 

Secondly many of the PSU companies are entering the high growth phase in terms of their capacity expansion and have significant earnings growth potential in the coming years warranting a re-rating of the stocks.

Thirdly this asset class has a long dated option value attached to it in the sense that any privatisation or any regulatory positives like reform initiatives in oil subsidy, banking, power, etc would unlock huge value.

Fourthly this asset class is more defensive in nature, more resilient, high dividend yielding and offers an exposure to high quality companies in sectors that are core to India’s growth story. Hence we think PSUs could be a good investment theme in the coming years.

We talk about disinvestment as a basis for re-rating of these stocks, but where is the progress? Even if we assume that the government will divest its stake what difference can a small stake sale make? These companies will be still owned largely by government...

What we are seeing is that the process of disinvestment changes the attitude of the owner, namely the government and the management and also improves the functioning of the companies because of what we call as ‘searchlight effect’. The reasons to play the theme are more to do with what we explained earlier.

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