The Unlikely Champions

There's a simple question. In the battered and bruised market conditions of the past year, which class of stocks has been promising outstanding returns to investors? If you picked blue chip private sector giants like Reliance, Hindustan Lever, Tisco, Telco, Bajaj Auto, Larsen & Toubro and their ilk, you would be dead wrong. One group that has surpassed these blue chips in terms of investor returns are the much maligned PSUs.

Over the past one year, the better run and profitable PSUs like MTNL, VSNL, Container Corporation and BHEL shot up and registered sharp gains. But, more surprisingly, even perpetual loss-makers like ITI and HMT have outperformed all but the bluest of blue chips from the private sector.

 

Take a look at The Vital Statistics. In the past one year, ITI showed excess returns over the Sensex by a whopping 39.9 percentage points while HMT outperformed the Sensex by 36.6 percentage points. Hindustan Zinc and Bharat Earth Movers showed even higher investor returns -- showing excess gains over the Sensex to the tune of 115 and 194 percentage points respectively!

In contrast, among the private sector blue chips, Hindustan Lever (HLL) and Reliance Industries were the only ones coming even close to those returns. HLL outperformed the Sensex by 47.56 per cent and the Reliance scrip showed excess returns over the Sensex to the tune of 26.4 percentage points. Bajaj Auto outperformed the Sensex by the narrowest of margins -- 9.6 percentage points. Tisco, Telco, Grasim and Larsen & Toubro actually showed negative returns vis a vis the Sensex over the same period.

In fact, fund managers have been quick to take note of the trend. Says a fund manager of a leading FII: If you track fund performance over the past year, the funds with the large weightages in PSU stocks have been outperforming all others. UTI funds like Master Plus and US 64 have been beating the index largely because of their holdings of PSU stocks.''

But why has the market suddenly fallen in love with PSUs? Obviously, there are some PSU businesses that make great investment sense because they are market monopolies -- like the oil sector PSUs, MTNL, VSNL and Concor. But that still doesn't explain the run up in stocks of perpetual loss makers like HMT and ITI.

So why are they moving up? PSU stocks cannot be valued the same way as other stocks in the market, says Vinay Kamat, chief operating officer, J M Financial and Investment Consultancy Services. You should look at entry barriers in the industry in which a company is in