We have explored the latest Risk - Reward proposition in PSU stocks and PSU stock related Mutual Funds. Is it the right time to invest in such fund or is it already costly ?
Given below is the return chart as on 22nd Jan 2024 :
In last 3 months, this category has done extremely well and have emerged as a new industrial house. See the phenomenal performance of this category over last few months ( data as on 22nd Jan 2024) :
PSU Stocks which have been listed for years and till a year back were available at dividend yield of 6 % and no one was ready to look at them. They have suddenly caught the fancy.
As reported in Economic Times :
"While this phase of PSU rally started with anything related to railways, in the last few sessions, every PSU stocks has been rallying. Given the fact that the institutional holding is not very high, any participation by either domestic or international investors can lead to a sharp spike. Normally, after this kind of spike comes into picture “money chases the momentum” part of any bull run. If one is looking to invest in a PSU after this run up, have the right expectations as their risks are very different as compared to private companies"
Another reason why expectations need a reset is that in the last six months, everyone has been looking for PSU stocks and when too many people are looking for something one needs to be watchful, as the possibility of weaker hands getting caught on the wrong foot are high.
PSU stocks over a long period of time use to do well only when , there was a divestment announcement in that stock or there were any dividend announcement in it . Nobody on the street was interested in looking at whether the company is growing at a good enough rate, what the business was, whether it had any moat or not. But then all of sudden things changed and the changes are flowing into every part of the PSU space. Over the last nine years, rather than focussing on divestments, the government has been fixing some issues which were acting as hindrance in operational efficiency.
Well, this is not to say that everything has been sorted and doing well, but it surely far better than what it used to be. If one reads the management discussion and analysis part of some of the PSUs of last two years annual reports, they are every different from what they used to be a decade ago
In the last three months, the returns delivered by PSU stocks have not only made them out performers in the short term, but in certain cases, they have been able to cover the underperformance of the past many years. Key reason has been the realization on the street that some of these PSUs operate in an area where the private sector will not or cannot make an entry for multiple reasons. Like in case of railways, the project is so large with such a long payback period that only a PSU financier focusing on railway has the ability to do it because its cost of funds is very low.
Not to forget - government has pushed for operational reforms through their various administrative ministries, which has resulted in this change ! So, policy continuity at the central government level has becoming extremely important for PSU to continue good performance. Street has crossed their fingers to see the continuity in central government stand.
What are key Risk or challenge in PSU Stocks ?
In the private sector the information about the track record of management or select person is not tough to figure out, but in PSU’s there is hardly any information about whether the new top person is competent or not to run the business he has been brought to run.
As reported in Economic times : As far as analysts' estimates are concerned, in a large number of stocks, the estimated return over the next 12 months is extremely low. One reason for this, first the sharp run up in the last four months has taken the stock price close to their earlier target which has still not been revised. Secondly, in any case, most PSU management are not very optimistic when it comes to giving projections, so even analysts are not in the best position to come up with best estimates. Given below are some of the PSU stocks where we see potential upside from here :
Following are the list of some of PSU stocks, where you should be careful before buying as they have already captured the upside and seems to be over valued :
Conclusion : This PSU category is a good , long term wealth creator category. There are a lot of upside remaining in this category and one should capture this theme through SIP route.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.