'PSUs as an asset class is a good investment theme'

Q&A: J Venkatesan, Fund Manager, Sundaram BNP Paribas Mutual Fund

With the government planning to mop up Rs 24,000 crore through disinvestment this financial year, investors have once again become interested in public sector companies. J Venkatesan, fund manager, Sundaram BNP Paribas Mutual Fund, who manages the recently-launched Sundaram BNP Paribas PSU Opportunities Fund, speaks to Jitendra Gupta on PSU stocks.

Why do you think that PSU stocks can be an investment theme?
PSUs as an asset class is a good investment theme for several reasons. First, this asset class has a good valuation gap compared to the private sector. While we think that this gap may not get bridged completely, it will narrow as operational parameters of PSU companies have improved significantly over the years. Second, many PSU companies are entering the high-growth phase in terms of capacity expansion and have significant earnings growth potential in the coming years, warranting re-rating of their stocks. Third, this asset class has a long dated option value attached to it in the sense that privatisation or regulatory positives like reforms in oil subsidy, banking, power, etc, will unlock huge value.

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

We talk about disinvestment as a basis for re-rating these stocks. But where is the progress? Even if we assume the government will divest, what difference can a small stake sale make? These companies will be still owned largely by the government.
What we are seeing is that the process of disinvestment changes the attitude of the owner, namely the government and the management, and improves the functioning of the companies because of what we call the “searchlight effect”. The reasons for playing the theme are more to do with what I explained earlier. In fact, the PSU asset class offers a good proxy to play on India’s long-term economic growth story. The main reason being it is difficult to imagine growth without PSUs contributing to it or benefiting from it. They are either monopolies or have dominant leadership in many key sectors such as energy, financials, power utilities and materials that form the core of India’s growth story.

When and how do you think this theme will play?
This theme is already playing in the market and we believe the re-rating process will get accelerated in the coming years as there is a favourable political environment, recognition by the market players of PSUs’ inherent strengths and as managements of these companies become more transparent and proactive in their communication to their shareholders.

How would you approach this theme in terms of selection of stocks and sectors?
Even though PSU stocks account for about 30 per cent of the total market capitalisation and this will move to 40 per cent if the government brings new candidates for divestment such as Coal India, Nuclear Power Corporation, etc, the number of stocks is less. We will examine all the stocks in the universe and the selection will be based on earnings growth potential, industry prospects, our assessment of the management, benefits on account of expected regulatory changes, etc. The will be mainly financials, energy, power and materials.