June 19, 2024

The Art of Investment

Mastering the Stock Market Strategies

PSU equity: Bet on PSUs only if bullish on India growth story; never in the short-term: Anand Sharma

9 min read
Anand Sharma, Equity Fund Manager, ICICI Prudential MF, says “a large part of the power sector in India is controlled by the public sector enterprises. A large segment of oil and gas, both as far as upstream and downstream companies are concerned, are PSUs. PSUs are very big in the financial segment when you look at banks, when you look at life insurance companies, a few general insurance companies, power financiers. Apart from that, there are many other sectors where PSUs are present like logistics, metals and mining, fertilisers, railways, etc. So, it is a very wide theme wherein the government of India through central and state governments has a significant exposure on a day-to-day running basis.”

We will be talking about the PSU equity theme and get into the nitty-gritties of your fund as well. We will talk more on your strategy and exposure but before that, let us lay down a basic understanding of this particular sector that we are referring to, what does it involve and what type of companies and what kind of market exposure are we talking about?
Anand Sharma: If you talk about the PSU category, as the name itself suggests, these are companies where either the central government of India or the state government of India has a significant say in running of operations on a day-to-day basis. That is the basic definition as far as a public sector enterprise is concerned.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
Indian School of Business ISB Chief Digital Officer Visit
Indian School of Business ISB Chief Technology Officer Visit
IIM Lucknow Chief Operations Officer Programme Visit

Now, although the name suggests public sector enterprise, the beauty of this PSU theme is that it is present across various sectors. Now, if you just broadly look at all the sectors where PSUs have a presence, it is just phenomenal. A large part of the power sector in India is controlled by the public sector enterprises. A large segment of oil and gas, both as far as upstream and downstream companies are concerned, are PSUs.

PSUs are also very big in the financial segment when you look at banks, when you look at life insurance companies, a few general insurance companies, power financiers. Apart from that, there are many other sectors where PSUs are present like logistics, metals and mining, fertilisers, railways, etc. So, it is not a narrow theme comprising just a few stocks and sectors, it is actually a very wide theme wherein the government of India through its central government and state government has a significant exposure on a day-to-day running basis.

PSU is a very wide theme and a category across sectors as you rightly explained. How would you like to explain the investor profile that should be putting their money in this particular category?
Anand Sharma: First and foremost, one of the advantages that a public sector enterprise enjoys is that typically PSUs are supposed to pay a certain amount of cash flow that they generate in the form of dividends or buybacks to shareholders, so typically that is one advantage that PSUs have always enjoyed. Also, because of the fact that they are sovereign entities, you typically do not tend to worry too much about aspects like say a cost of borrowing or other factors.

Those are a couple of inherent advantages that PSUs typically tend to enjoy. Historically, if you look at PSUs, one of the aspects that people have always looked at for investing in PSUs is just people tend to look at the dividends that a PSU tends to offer but actually if you break it down and if you go back into history, PSUs have always tended to do well when the business environment for those PSUs in which they operate in they are on an improving trajectory. So from a risk profile perspective, first and foremost it is a thematic fund even though PSU covers a lot of sectors, so to that extent the exposure that any individual would want to have in their in their stock market portfolio, obviously it cannot be a very high exposure and people should bet on PSUs only if they are bullish on the growth story of India, it should never be a short-term, one year or two year call, it has to be a long-term call where the business fundamentals of the PSUs if they are on an improving trajectory, then obviously those particular sectors and stocks can tend to do well. If the fundamentals are not going to be good, then it is unlikely to do well whether it is a PSU or a private company.

Let us also shift focus to your specific fund, ICICI Pru PSU Equity Fund and the kind of sector allocation that we are also looking at. Power has almost 20%, banks 18%, oil 10%, petroleum products around 8%, consumable fuels around 7%, insurance 3%. Power has the maximum bet placed over here. So, what is the strategy across sectors and behind selecting these companies also of these specific sectors?
Anand Sharma: While looking at PSUs as a sector, the first thing you have to do is to break it down into two components. First and foremost, there is a domestic cyclical component in which you are entirely betting on the growth story of India and then second part of the portfolio is a global cyclical component. Now, let me spend some time on explaining both of these two facets. If you look at the domestic cyclical component, as you rightly said, there are sectors like power, financials, logistics which are essentially a play on the domestic economy doing well and those particular sub-segments also doing well and then also in PSUs you have a global perspective as well.

For example, if you look at a sector like oil and gas, no matter what we might want to say the prices of oil are not necessarily determined by what happens inside the country, the prices of oil are in a lot of ways determined by global geopolitics. We have seen in the last two years how geopolitics has influenced the prices of oil, how they have gone up and down depending on how geopolitical escalations have happened across the globe and also the other major sector which is in a big way linked to what happens across the globe is metals.

If you break down PSUs, there is a basket of domestic cyclicals and there is a global cyclicals. So, at this point of time our positivity is more towards the domestic cyclical part of the economy wherein obviously a sector like power and a sector like financials play a very important part. Now, if you simply look at power as a sector, there are a lot of fundamental changes that have happened for the good in this sector for the last maybe six-seven years or so.

Six-seven years back, we all used to hear about the problems in the power sector, the problem that various discoms are facing. I think many of those problems have definitely been ironed out and have improved. So, today you have a situation where India as the economy is beginning to do well and hopefully it continues to do well. Power is a very important part of the economy.

As typically power demand and the economic growth of the country tends to get interlinked in a very high correlation and I think unfortunately what you will also see in the next two-three years is that the demand for a sector like power is growing at a certain rate whereas capacity does not get added so quickly. If you want to add capacities in thermal power or renewable power, it takes some time so there is a demand-supply mismatch.

I also want to understand your interest in aerospace and defence. No doubt this sector is gaining momentum. We have seen the triggers that most of the companies related to this sector have performed. But how bullish are you on this sector and going ahead do you see your exposure going up in aerospace and defence?
Anand Sharma: Defence as a category has emerged in a big way in the last two years because of all the geopolitical issues that the world has been facing. I do not think that as a country we or any other country would rather have a choice than to increase their spend on defence. So, theoretically over the next few years, over the next decade or so, India will definitely have to spend a significant amount on defence and we also need to catch up with the global players in our defence spending.

So, as far as that aspect is concerned, I do not see a challenge. The only challenge that this aerospace and defence as a theme faces is that the number of investable stocks is slightly limited. So, from a valuation perspective, we are beginning to see some amount of valuation discomfort. But from a thematic perspective, I do not see a challenge in aerospace and defence as a theme for the next seven-eight years at least. So, the call for us will always be as far as valuations are concerned.

Are you fully invested or are you also sitting on cash?
Anand Sharma: As far as our published portfolio is concerned, we have raised some cash in the last few months or so and the reason for that has been basically wherever we felt that there have been pockets of discomfort in valuations we have preferred to raise some cash.

How would you like to explain your exposure across large, midcap, and smallcap categories in this specific sector?
Anand Sharma: If I look at our published portfolio, you will see that two-thirds of this portfolio is in largecaps and if you look at this theme, this will always be a slightly cap dominated portfolio primarily because of the fact that a lot of the large companies which are there in PSUs and which have large market shares in various industries that they are present in they are essentially a largecap, so this will always be a largecap dominated portfolio.

Where do you think the valuations in a couple of quarters would cross the threshold of being in the comfortable zone and maybe going down two-three quarters, you would want to trim your exposure?
Anand Sharma: First and foremost, we need to understand that right now at this point of time we have a general election going on in this country. We are done with only two phases and in the next month or so, the results will be out.

What you can expect is that over the next maybe month or a quarter, there may be some volatility in this theme generally. From a sectoral perspective, the two sectors where we definitely have had the most comfort are definitely power and oil and gas as a theme. Definitely these are the two sectors where we have most comfort today in this theme and there are certain sectors which we are on the lookout to invest in as long as valuations get comfortable.

If one wants to include a PSU equity fund, what should be the portfolio strategy in terms of allocation to this particular fund considering that one might have a basic and a core portfolio already laid down.
Anand Sharma: It is a very valid question. This is definitely a thematic fund and generally we as a house have always believed that asset allocation is a very important part of any investor’s corpus. So keeping that aspect in mind, we would urge people to have a thematic portfolio whether it is a PSU fund or any other theme, it should definitely have a smaller part of any investors investable corpus because one of the challenges sometimes that a thematic fund might face is entry and exit can become important.

We have seen in the past that investors’ experience in thematic funds, if not entered and exited at the right times, has not been great. So, we would urge people that anybody who wants to have exposure should look at it as a thematic fund with a smaller portion of their investable corpus.

What should be the return expectation from an investor from this category?
Anand Sharma: That is the trickiest part. I think there are too many moving parts right now, not just in India but across the globe as well.

Should the timeframe to be in this fund be more than five years?
Anand Sharma: Definitely, it has to be long term.

link

Leave a Reply

Your email address will not be published. Required fields are marked *

Copyright © All rights reserved. | Newsphere by AF themes.