Public sector undertakings (PSUs) have generated a lot of investor interest over the past couple of years. Many stocks in the space have given multi-fold returns in recent years, after over 7-10 years of relative underperformance till late 2021, as most domestic and international investors shunned government companies in general.

The government focus on building infrastructure, cleaning up pubic sector banks’ balance sheets, indigenising defence production and reforming the power segment, apart from a host of digital and other initiatives, has put the spotlight on PSUs. Attractive valuations and dividend yield are other draws.

In this regard, Quant Mutual is coming out with a new PSU fund that is open for subscription till February 15.

Read on for more on the new fund offering (NFO) and whether you must invest in the scheme.

PSU space in overdrive

As a segment, PSUs span many industries. Though financials dominate, we have oil & gas, defence, power, capital goods, metals & mining companies, among many other sectors, with government ownership.

After years of being in the doldrums, the PSU segment has been on fire in recent years. Public sector bank NPAs (non-performing assets) are at record lows, and it is the PSUs that lead capital expenditure in the economy. Indeed, the Budget forecasts a capital expenditure of Rs 11.11 lakh crore for FY25, up 11 per cent from FY24. Defence production localisation and exports are other growth areas. Thus, there is broad scope for PSUs to gain from.

In the last one year, the S&P BSE PSU TRI index has given a whopping 103.3 per cent returns, compared to 22.9 per cent from the Nifty 50 TRI. Over the past three-year period, the PSU index has delivered a spectacular 46.8 per cent annually.

Despite the run-up, the S&P BSE PSU TRI trades at a price-to-earnings multiple of just 11.5 (February 8) and offers a dividend yield of 2.35 per cent. For perspective, the S&P BSE 500 TRI trades at a PE in excess of 25 times.

Low valuations in PSUs may be value traps at times and companies in the space can have long periods of underperformance and may also be impacted by government actions.

What must investors do?

As a fund house, Quant has done quite well across categories over the past four-five years. The Quant PSU fund will seek to use the house’s VRLT (valuation analytics, liquidity analytics, risk appetite analytics and timing) framework to shortlist stocks. Quant PSU aims to have a concentrated portfolio of stocks in the PSU space that would gain from the positive driving factors mentioned earlier.

The approach will be business-cycle oriented to take exposure to stocks and sectors that are at the right phase, from the broader positive dynamics for the economy.

The PSU space has only three dedicated active funds, and only two have a track record of more than three years. On a point-to-point basis, even these two have failed to match the S&P BSE PSU TRI over one and three-year periods.

Invesco India PSU Equity has a longer track record of over five years, and has delivered reasonable returns.

Investors can wait for the Quant PSU fund to develop a track record before taking exposure. However, for investors with a high-risk appetite, wanting to gain from the PSU rally, can consider small sums as SIPs in the fund over the long-term for diversification.