Since NDA Government has come to power, fortunes of Public Sector Undertakings (PSUs) seem to be changing. Governance related issues have always raised doubts about functioning of PSUs. But as expectations from NDA Government are on a rise, the PSU theme appears to have rejuvenated.

There was a sharp rally in PSUs, due to which S&P BSE PSU index outperformed broader markets over the last 2-3 months, generating good returns for investors. And amid the exuberance in the market, a proposal is floated by the Securities and Exchange Board of India (SEBI) - intended at reducing Government stake in PSUs – which if implemented, could even help the Government in its commitment on fiscal consolidation.

So, what does SEBI's proposal say?
SEBI has proposed that minimum public shareholding in PSUs be raised to 25%; which at present stands at 10%.

And what could be the implications….

• If this goes through, at least 30 companies in the public sector will have to divest stake which may help the Government raise close to Rs 55,000 crore
  
  
• Disinvestment proceeds may aid in bringing down fiscal deficit
  
  
• Hiking minimum public shareholding to 25% would make shareholding pattern of PSU companies more diverse
  
  
• Going by past experience, retail investors' response to divestment programme might be high. The Government had offered special discount and loyalty additions to retail investors while it launched CPSE Exchange Traded Fund (ETF)
  
  

The list of companies in which Government may reduce its stake may get extended if finance ministry agrees to the proposal of SEBI. The proposal from SEBI is similar to the measure it took in 2010, when it made it mandatory for private sector companies to raise minimum public shareholding to 25% within 3 years. But ultimately, the decision rests with the finance ministry.

Nonetheless looking at the success of CPSE ETF, PersonalFN believes the Government may honour the proposal from SEBI.

So, should you bet on PSUs?
PersonalFN is of the view that, betting on a particular theme may generate luring returns for you when the going is good. But in times when the sector hits a rough patch, wealth erosion cannot be ruled out. You see, most of the stocks constituting the PSUs belong to sectors such as Energy, Financial Services, Fertilisers and Metals; which are cyclical in nature.

PersonalFN is of the view that, current rally in PSU stocks has been mainly on improved sentiments. Although valuations of many of them might be still decent, betting on them randomly through a direct route or through mutual funds following the PSU theme may prove to be extremely risky. The Government might attract retail investors by providing discounts in pricing and may even provide loyalty bonuses if it opts for CPSE route. But that yet does not give enough margin of safety when the markets have rallied ahead of fundamentals, just on sentiments.

PersonalFN is of the view that one should not speculate and go long, until things get clearer with policy announcements for the PSU sector. Do not assume that investing in PSUs, is safe or a good investment always. It may not be the case.

While you may want to capture opportunities in PSU stocks, a plain diversified equity fund or opportunities oriented fund coming from a dependable fund house can give you a chance of benefiting from PSU opportunities and reduce the risk. While you select a fund, you should choose one that has a proven track record of generating consistent returns across time frames and market cycles. PersonalFN writes on such funds in its FundSelect research reports.

Add Comments