Aditya Birla Sun Life PSU Fund: Good fund in current market conditions

05 Dec,  2020
By: Eastern Fin Research Team
#Mutual Funds

Background

Public Sector Undertakings (PSUs) were companies set up by the Government India and also state Governments to drive industrialization in India. The Indian economy was liberalized in 1991 and private sector companies were allowed in most industry sectors. PSUs still dominate almost all core sectors that are important for the growth of the economy. Through disinvestments Government has allowed public participation in PSU stocks.

Aditya Birla Sun Life PSU fund is an open-ended thematic fund investing in PSU stocks focuses largely on sectors like oil, gas, power, mining, banking, financial services and insurance sector, defence and engineering.

Why PSUs will continue to remain important?

  • PSUs will continue to dominate sectors where entry barriers are high in terms of capital requirements, regulatory clearances (particularly sectors which are related to national security), distribution reach and other factors.
  • These include sensitive sectors like defence equipment, aerospace and ship building. Sectors which require high capital outlay like oil and gas, oil refineries, coal mining, iron and steel, power generation and distribution etc.
  • PSUs will continue to dominate infrastructure sectors e.g. highways, railways, dams, ports, airports etc.
  • Even in sectors where there is significant private sector presence e.g. banking, insurance etc., PSUs shave the largest market share and distribution network.

Why should you invest in PSUs?

  • The scale and capacity of PSUs is much higher as compared to any other comparable private player.
  • PSUs have deep competitive moats especially in core sectors of the economy. Therefore, they have stable cash-flows with reasonably high visibility in future earnings.
  • Since Government of India is the majority owner of the central PSUs, they rely on their dividends to fund budget deficit. As a result, PSU public shareholders also enjoy high dividend yields.
  • The 2020 Union Budget, the Government unveiled plans to unlock the value in select PSUs through strategic disinvestments. We in Eastern Financiers think that this will present attractive investment opportunities for our investors.
  • The Prime Minister has articulated his vision of India becoming a $5 Trillion economy over the next few years. PSUs will have to play a leading role for achieving that vision.

Why are PSUs attractive now?

  • The chart below shows the average PE multiples of BSE PSU Index for the last 15 years. You can see that the BSE PSU Index valuation (PE multiple) is currently at the lowest it has been over the past 15 years. We can postulate that PSU stocks are quite cheap at current prices.

    Source: Bombay Stock Exchange


  • PSU stocks are currently at very attractive dividend yields. Dividend of BSE PSU Index is currently at its highest point in the past 15 years. Furthermore, even from a historical perspective, dividend yields of BSE PSU Index have been higher than that of the BSE Sensex. The average dividend yield of the Sensex in the last 15 years was 1.3%, while that of BSE PSU Index 2.7%. From a dividend yield standpoint PSUs have been more attractive and even more at the current levels.

    Source: Bombay Stock Exchange

  • We in Eastern Finance expect the Government to push for more aggressive reforms including disinvestments to bring back GDP growth in the aftermath of COVID-19. With markets sentiments turning, we expect favourable returns from PSUs.

About Aditya Birla Sun Life PSU Fund

The scheme was launched at the end of last year. It invests predominantly in in PSUs or companies in which central/state government have at least 51% shareholding. The scheme will focus on a portfolio of 30-35 stocks, with an intended 60-70% exposure to large caps and the balance to mid & small caps. Bottom-up approach would be followed for stock-picking.The scheme will seek to invest in companies which have prospects of future growth & scalability, reasonable Return on Equity, sustainable cash-flows to maintain their dividend yield and reasonable valuations in relation to the broader market.

Easter Financier’s views on the Fund

  • We expect PSUs to perform well in the economic recovery from COVID-19 due to the inherent advantages they enjoy as discussed in this article and also from favourable Government policies
  • PSU stocks are trading at very attractive valuations and provide compelling investment opportunities for investors with 3 to 5 year investment horizons
  • Aditya Birla Sun Life is one of the largest Asset Management Companies in India with good long term track record of delivering good returns to investors
  • Tactical investments in thematic funds like Aditya Birla Sun Life PSU Fund can complement your core portfolio of diversified equity funds. You can allocate up to 5 – 10% portion of your equity portfolio to this fund.
  • You can contact with your Eastern Financier’s financial advisors if you want to know more about this fund and its suitability for your investment needs. You can also contact us at 080-40006800 / email us at service@easternfin.com and our advisors will get in touch with you.
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