Mutual Funds

Religare Invesco PSU Equity Fund: Buy

Aarati Krishnan | Updated on September 14, 2013


PSUs have fared better than Sensex companies on profit and sales growth during the slump.

Advisers usually recommend equity mutual funds to investors, based on how well they have fared over the last 3 or 5 years. This may work well for diversified funds, but it is unwise to apply this to thematic funds. It is best to buy a thematic fund when the sector or theme is out-of-favour, as that is when the underlying stocks can be bought at attractive valuations.

Funds that invest in PSU (public sector undertaking) stocks appear to be a good bet today for this reason. They are completely under the market’s radar and trade at bargain valuations, despite reasonable fundamentals.

Big discount

Investors who are willing to take on the risk of being contrarian can buy units of the Religare Invesco PSU Equity Fund, a good fund within this space.

Funds that invest in PSU stocks (there are four such funds) have fared much worse than the broad market as well as diversified funds in the last three years. The worst performing PSU fund lost 15 per cent on an annualised basis over a three year period while the Sensex gained 2 per cent. The story over the last 1 year or 6 months is no different, with PSU funds reporting significant NAV losses.

This poor run has pushed PSU stock valuations into a big discount relative to the market. The BSE PSU index now trades at a price-earnings multiple of under 8 times and a price-book value of about 1, while the Sensex is at 17 times and 2.6 times respectively. Just three years ago, the PSU index hovered at 20 times.

Why buy

Bad loan-related problems at public sector banks, subsidy and currency issues with oil companies, and fuel and commodity price related issues at power and metal companies, have sparked this de-rating.

However, de-rating of PSU stocks as a class does seem to be overdone. For one, PSUs have fared better than Sensex companies on profit and sales growth during the slump. Two, most PSUs are free of the debt or liquidity issues now dogging private companies. In fact, many are quite cash-rich and likely to raise their dividend payouts.

Why Religare Invesco

Three, PSUs are also largely well-governed and deserve a premium valuation for this aspect.

While none of the PSU funds have a 5 year track record, Religare Invesco PSU Equity has done very well within the category over the last three years. On 3 year, 1 year and 6 month time frames, this fund has contained its losses to levels much lower than its peers as well as in the BSE PSU index.

A study of its portfolio shows that the fund follows a value-oriented approach while avoiding the riskier bets within the PSU space. While power companies make up 20 per cent of the August portfolio, the allocation is mainly to PowerGrid and NTPC, companies with high earnings visibility and limited debt. Among oil companies, ONGC, BPCL and Oil India make up big exposures, reducing rupee risks.

The fund is large-cap oriented with a median market capitalisation of about Rs 10,000 crore.

With average portfolio PE at less than 8 times, the fund allows investors to pick up under-rated bluechips in the PSU space. The current NAV is Rs 8.14 per unit for the Growth plan- Direct option.

Published on September 14, 2013

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