Aditya Birla Sun Life Mutual Fund

Why maybe it’s time to invest in PSU Sector?

Dec 20, 2019
6 mins | Views 11369

What do you think when you hear the words – Public Sector Undertaking (PSU)? You probably think of government owned, capital heavy industries which are good for debt investments. While in the debt category, PSU government bonds are looked upon as probably the safest since they are issued and guaranteed by government enterprises – there is less reliance on PSU stock as good investments in the equity space.

It may be time to look at things differently as there are several reforms underway which may present PSU stock investments as means of earning growth for its investors.

What exactly are PSUs?

PSUs are companies that are essentially state owned – i.e.: central/state government have at least 51% shareholding in these companies. These companies primarily dominate certain core sectors of the economy such as defence, infrastructure, oil and natural resources, utilities etc.

What does the future look like for growth of PSUs in India?

From 2016-17 to 2017-18, the Central Public Sector Enterprises clocked in a growth of 11.61%1 in their total income. As India has gained the status of one of the fastest growing economies in the world, the PSUs are likely to grow in tandem to support this fast-paced growth. Let’s look at what can make this possible for PSUs in India:

  • PSUs make up the core of the economy – As India grows, PSUs are bound to grow

    PSUs operate in sectors that are central to the growth of the economy – in essential areas such as infrastructure comprising road, railways etc, exploration of oil, minerals and natural resources, public utilities such as power generation and distribution. As the economy grows ahead at a fast pace it is imperative that these sectors grow as well to accommodate the needs of a growing economy. A growth comparison of PSUs vis-à-vis the GDP of the Indian economy can illustrate this:


  • Favourable position of PSUs in the economy

    PSUs have a monopolistic position in several core sectors of the economy giving them an edge when it comes to growth in these sectors. In fact, the 2017 Forbes 2000 list featured 58 Indian companies of which 27 are PSUs2, thus making their presence felt across core sectors.

    Further testament to this is that profit-making PSUs have in fact been on the rise in the last few years1:


  • Government reforms

    The government has time and again indicated its intention to make reforms to drive the growth and progress of PSUs in India. Be it the recent massive push to infrastructure through increased budget allocations, banking and NPA reforms, funding assistance to struggling PSUs or the ‘Smart City’ initiative.

    The government’s inclusive programs of ‘Housing for all’ and ‘Power for all’ looks to increase access of these facilities across the length and breadth of the nation. The potential for growth in these sectors dominated by PSUs is thus plentiful.

  • Divestment initiatives

    Simply put, divestment of PSUs means selling-off government holding to some extent to private players or to investors in the open market. The government has announced a large-scale plan of strategic disinvestment of several PSUs.

    This can have a potential two-fold benefit – traditionally government managed and run PSUs can have access to a more professional management which can contribute tremendously to increase their efficiency and performance. Secondly, PSUs are largely undervalued on the stock market, disinvestment of these PSUs in the stock market can help them unlock their true intrinsic value providing significant capital growth to its investors.

    This has been demonstrated statistically by the movement of the NIFTY PSU Index vis-à-vis the benchmark NIFTY 50 Index post large scale PSU disinvestments:


With a positive outlook for PSUs in the years to come, PSU investments can indeed prove to be hidden gems waiting to be unearthed by investors. PSU investments like most equity investments need to be nurtured over a long duration to accumulate returns. Aim to enhance the long-term component of your investment portfolio by investing in Aditya Birla Sun Life PSU Equity Fund - an open ended equity scheme following the PSU theme.


Sources:

1The Public Enterprises Survey 2017-18
2Dun and Bradstreet report on ‘India’s Top PSUs 2017’

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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