ICICI Prudential Mutual Fund has recently launched ICICI Prudential PSU Equity Fund, an open-ended equity scheme which will invest predominantly in equity and equity-related instruments of PSU companies. The fund will be managed by Mittul Kalawadia and Anand Sharma.
Sanjeev Sinha of FE Online caught up with Mittul Kalawadia, Senior Fund Manager, ICICI Prudential AMC, to understand his rationale behind the launch of a PSU Fund and what should investors be mindful of when investing in such a fund. Excerpts:
What is your call on PSU as a space?
As a fund house, we are positive on the PSU space because valuations here have been attractive for a while now, there is better margin of safety to investors, most of these names offer better dividend yield than broader markets and many of the sectors in the PSU space are witnessing an improvement in cycle due to sector-specific fundamental reasons or economic activity picking up, etc.
What is the rationale behind launching a PSU Fund?
At a time when the market is likely to be volatile and there are uncertainties owing to various developments globally, we believe PSU is one space which is offering investors a better margin of safety as compared to the broader markets. Also, many sectors where these PSUs are present are witnessing improvement in their business cycle. As a result, their earnings growth momentum could be strong. Also, over the past five years, the sentiment around PSU as a theme has been subpar. Such conditions generally tend to offer good investment opportunities.
Sectors with PSU dominance are experiencing a turnaround. Do you see this trend continuing?
There are several sectors wherein PSU names are either dominant players or sector leaders. For example, defence, power, banks, energy are some of the pockets where PSU presence is very robust. We believe many such sectors have bottomed out and are witnessing improving business cycle. These cycles tend to be longer in nature and thus the momentum is expected to continue for the next couple of years. We believe these companies will stand to gain as the economy moves away from the pandemic-induced blues. Also, the government’s focus on indigenization will further help PSU companies.
Do you see an improvement on PAT basis of the PSU companies among the top 100 companies?
As of March 31, 2022, in terms of market capitalisation, PSU names accounted for only 8.6%, but these companies contributed for nearly 34.2% in terms of PAT (Profit After Tax) of the top 100 companies in the country. We believe in the medium to long term this trend is likely to persist.
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Stable Dividend is one of the reasons investors tend to opt for PSU names. Is that a correct approach to investing?
When it comes to investing, dividend should not be the sole factor of consideration. While PSUs are known for their higher dividend payouts, it is imperative that an investor should consider other qualitative and quantitative parameters as well before making an investment decision.
What should an investor be mindful of when investing in a PSU Fund?
Several PSUs across sectors are likely to witness a turnaround in the near to medium term. For example, public sector banks are in the middle of improving cycle wherein Return on Equity (RoE) has just begun to pick up and credit cost appears to have bottomed out. Similar is the case with power generation where the demand-supply situation is likely to get tighter, leading to improving profitability – again a space that is mainly dominated by PSU players. So, an investor should be ready to stay invested for at least three years and more to benefit from the changes which are likely to play out.