On the comeback by PSU stocks
As far as PSU stocks are concerned, there was never a debate in terms of whether there is intrinsic value or not. It was just a question of the mood of the market and also how the business outlook will change for some of these businesses. While the ownership is common across PSUs, we need to see what are the sub segments that they are operating in.
In financials for example, two biggest concerns in the past were about capital adequacy and the quality of the asset book. Both of these concerns are behind us and provisioning levels have gone up with the pandemic. The asset quality issues have held up during the pandemic. So PSU banks are reasonably placed at this point of time, when we are looking at improvement in the telecom companies.
PSUs are also operating in many other segments — be it oil & gas, power, logistics or defence manufacturing. Many of these segments are seeing a better outlook going forward and also the companies have reasonably managed the entire Covid crisis. At this point of time, they seem to be in a position to cash in on the improved outlook that we are likely to see as economic momentum comes back. Suddenly, this is one pocket which is continuing to trade below intrinsic valuation levels, especially relative to other sectors of the economy, making these stocks attractive to investors.
Are low prices making the PSU companies more attractive? What about IRCTC then?
As I said earlier, PSU companies are not a homogenous basket. PSUs represent different industry segments. We will have to evaluate in terms of valuations and growth from a bottom up perspective. Yes, there are some pockets which have really run up in the past given that a lot of change has happened in that particular segment and also the kind of expectation that are built on the digital business.
But there are also other businesses which have not been looked at by investors keenly in the recent past and so there is still value in some of the other pockets and segments like logistics where with trade and commerce picking up with freight corridor coming up, there will be a lot of positives. So one could play that through some of the PSUs as well.
Another example is the government policy on defence manufacturing. The government is looking to bolster indigenous manufacturing of defence equipment, ammunition etc. That will keep some of the defence manufacturing companies going for higher growth at least in the medium term. Similarly, there are ESG considerations and increased forward demand etc. which are leading to an uptick in the oil and gas segment as well as fossil fuels and in the power generation as well.
So different dynamics are playing out and in many cases the ignored PSU companies are now the market leaders in those segments. We could see the outlook for some of these companies from a stock performance perspective changing meaningfully.
Many analysts were basing their investment thesis within PSUs on the possibility of a successful Air India disinvestment and BPCL following through. If these two were to get delayed, would the entire theory of PSEs springing up get challenged?
Definitely that is an important aspect to look at. Yes, there has been a delay in privatisation due to Covid pandemic and we still are not very sure how that is progressing at the current juncture but what is giving confidence to markets in at least some of the cases is the fact that the government holding in many of the stocks has come down to the lowest levels possible and also the government may be clear that they are open to privatisation.
Maybe there is a delay in the current juncture but even going forward they would be looking at such opportunities. Given all this, it seems the frequent offer for sale (OFS) which used to come into the market and which used to put pressure on the stock prices may not be coming up that often going forward and if at all it could be more through privatisation or strategic disinvestment. If that is the case, then the valuations will not suffer.
The entire power space and the power ancillaries within the PSU pack are holding out. Is this a long term story at play or would you say that this is at best a short term aberration?
We are still not sure about the long term wealth creation in power generation. We do have some position in power generation in our portfolios but I would say that it has not been a core part of our portfolio. We look at it more as ethical at this point of time and also we are in a phase of a market which is showing very frequent rotations from one underperforming sector to another. So we need to see whether some of these fundamentals which have turned positive in the power sector will continue to remain that way or not. Subsequently we will be able to decide whether to hold it for a medium to long term or if it is going to be a tactical position.
What is your view on metal counters? Are they the counters to bet on if one is betting on a global rally that may continue for many years in commodities and specifically in metals?
I would not like to go into stock specific recommendations or clarifications. Having said that, on the metals overall we continue to remain positive although over the last four or five weeks, we have gone a little bit negative on the ferrous metals given the fact that there has been concerns about the Chinese real estate market following the Evergrande fiasco and also the kind of regulatory clampdown that we have seen in that space in China.
What it means for ferrous metal demand going forward is something of a concern. However, we continue to remain very positive on aluminium. We believe the ongoing peak organisation move in China where they are shutting old capacities or are making more investments to bring it into the right level of environmental standards. That is definitely keeping the overall demand supply situation in favour of manufacturers and any new manufacturing will come up at a reasonably higher cost which means that the significant strength that we have seen in the aluminium metal will continue to remain strong for some more time.
Indian companies are also looking at deleveraging in a very focussed way. We have already seen significant deleveraging in both ferrous as well as non-ferrous companies in the last 12 to 15 months and given the pricing strength and the demand structure, we expect the deleveraging process to continue going forward. So, we continue to remain positive on the metal space as a whole. Over the last few weeks, we have gone slightly negative on ferrous metals but continue to remain very bullish on the non-ferrous.