The S&P BSE PSU Index posted decent returns in 2021, perhaps because of good performance by cyclicals and government's disinvestment drive. How do you see PSUs doing in 2022? What's their value proposition now?
The S&P BSE PSU Index is dominated (73 per cent of the index) by companies in cyclical sectors like financials, materials, industrials and energy. These sectors had faced disproportionate brunt of the pandemic last year but have witnessed a sharp recovery in 2021. The improvement in business-activity levels and uptick in realisations has helped cyclicals in general. Less than initially feared asset-quality stress has led to stock-price recovery for the financial sector as well.
Historically, PSU companies were incorporated in core sectors of the economy with the agenda of socioeconomic development and higher control of critical sectors like power, steel, banking and energy with the government. It was the need of the hour way back in 1950s post our independence. Thus, major PSU companies operate in core sectors of the economy that happen to be cyclical in nature. PSUs do offer a unique proposition as they are monopolistic or have unique business advantages, either backed by government policies or statutes, or they have access to natural resources at very competitive rates.
In our Invesco India PSU Equity Fund, we try to balance this cyclicality to some extent by adding some structural growth stocks like gas utilities, life insurance, home finance, etc. Also, we ensure that large portion of the portfolio is (a) on the right side of government's incremental socioeconomic agenda and (b) in companies that do not have challenges in redeployment of cash flows. However, the fund, because of the very nature of the companies it holds, would still be more cyclical than any other diversified portfolio. Also, as PSUs are monoline, we could not completely wish away sub-optimal capital allocation done by the companies for larger socioeconomic good and we try to minimise such risks by our stock selection and portfolio construction.
Going ahead, Indian economy will witness healthy growth momentum, driven by the revival of consumption post-COVID, low corporate leverage, healthy global liquidity, as well as growth-focused central bank and government. The economic buoyancy over the next three-four years - which may face a few manageable roadblocks in the form of inflation, US taper, and Omicron along its journey - will help the cyclical-industries-dominated PSU sector to report strong earnings growth. Valuation-wise, the PSU Index is attractive relative to broader markets as well as its own historical trading multiples for the return on equity and/or cash flows that PSUs generate.
Thus, favourable valuations, cyclical earnings uptick and government's intent as well as the necessity to divest on account of an already stretched budget on account of COVID will help the PSU sector do well in the medium term.
This interview was conducted in December 2021.
Also in the series:
Sectoral outlook 2022: Healthcare
Sectoral outlook 2022: Engineering & Infrastructure
Sectoral outlook 2022: IT & Telecom
Sectoral outlook 2022: Hospitality, travel & tourism
Sectoral outlook 2022: Automobiles
Sectoral outlook 2022: Consumption
Sectoral outlook 2022: Chemicals & textiles
Sectoral outlook 2022: Banking & finance
Sectoral outlook 2022: Energy and metals/mining
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