The multi-billion dollar rags-to-riches story of Indian PSU stocks is leaving mutual fund managers with no option but to join the party even if they are late than momentum-chasing retail investors. The ownership of PSUs in mutual funds has just crossed a 3-year high and looks poised to break the levels seen during the 2019 and 2014 Lok Sabha elections.

The first leg of MFs chasing PSU stocks, which was in sync with global revival in value trade, began in 2021-2022 but was restricted to few largecap PSU stocks only.

“This participation has finally started turning broad since October 2023 (also many new PSU names have got listed in the past few years). The proportion of PSU holding has just broken to a 3-year high in January 2024 as more funds start entering the trade (also due to sharp outperformance of many PSU stocks resulting in alpha chasing),” said Sunil Jain of Elara Capital.

Market data shows PSU holding in MFs as a percentage of total AUM rose to around 12% in January. In the last two occasions, it was noticed that MF ownership of PSUs typically go up in election months. In May 2019, MF holding had gone up to 14% while in May 2014 their stake was around 16%.

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The sharp outperformance of PSU stocks (Nifty CPSE has doubled in the last one year) means that smart money is hunting for a larger number of PSUs which were once shunned for poor operational performance, sub-par IRRs on re-invested capital and supply overhang coming from OFS.

“There is a desperation to participate in the PSU story. Hence we are seeing players mining deeper and adding more PSU names to the portfolio,” Jain said, adding that the average count of PSU stocks in a scheme ex-SBI has already reached closer to the number last seen in 2013 but the size of position is still low when compared to history.

Why are mutual funds having FOMO in PSU stocks?

Following a decade of underperformance prior to 2020, BSE PSU index has beaten Nifty by a wide margin but still trades at 40% discount to Nifty. As the Modi government has pivoted towards value maximisation for ‘sarkari’ companies, the change of stance offers further re-rating potential despite the recent rally.

“We believe that the government now sees the PSU space as a wealth-generating opportunity, rather than a medium to periodically divest shares for fixing fiscal deficit,” said Nirav Sheth of Emkay Global.

PSU RoEs had dipped from 14-15% level to 4-6% primarily due to the drag from PSU banks among others. “The overall RoEs have improved back up to 12-13% as the profitability has recovered and should improve further. Most PSUs have also seen large EPS upgrades with notable exceptions being ONGC, Concor and BHEL,” Jefferies said.

Prime Minister Narendra Modi has gone on record at least twice to elaborate on the improving performance of PSU companies and soaring stock prices. Triggering a buying frenzy from retail investors, PM Modi had on August 10 told investors to “daav laga dijiye” or bet on PSU stocks. Since then, more than 20 PSU stocks have given multibagger returns.

Also read | Modi ki guarantee on PSU stocks! 22 multibaggers, Rs 24 lakh crore profit after PM speech

Besides sector specific triggers, stocks across the PSU spectrum have also found support from Modi government’s accelerated capex spends.

Bulls argue that the PSU re-rating, however fast and furious, should not be taken lightly.

“The PSU story is synonymous with the India saga, a narration of several micro, albeit, powerful reforms (GST, RERA, JAM, digital infra, physical infra, PLI template, Bankruptcy Act, RBI’s inflation targeting and increasing credibility, etc) – each creating a small delta improvement, but in unison react in unpredictable, positive ways to generate waves. Force majeure luck events like ‘China plus one’ reinforce and accelerate the trend,” Sheth said.

PSU banks are outperforming private sector banks due to low valuations which many consider to be fair even after the run-up in prices.

“We expect PSUs to take the lead in infrastructure financing and corporate project loans – and if our hypothesis is right, the loan and earnings growth will decisively outpace that of private sector peers,” he said.

The ‘Modi ki guarantee’ factor may play out for some more time in PSU stocks and mutual funds don’t want to miss the party.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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