Why PSU stocks should not be ignored?

It is imperative to check the basics of a company before investing in it

Traditionally, there was a certain queasiness among common investors when it came to investing in stocks of Public Sector Undertakings (PSUs). Questions were asked whether investments in the state-owned companies would be gain or a drain. This may not be the case anymore. Currently, there is a sense of optimism around these PSUs as the investors have been reaping rich dividends from these companies in the past two to three years.

Why take PSU investment route

Many PSUs are on a high-growth trajectory. These companies are into expanding their capacities, resulting in increasing the earning potential and re-rating of their stocks. The growth rate of certain PSUs is very appealing.
Another positive is the long-term prospects of these companies in relation to policy measures. This means that any reforms initiated by the regulators in sectors such as oil, power, banking, or capital goods can unleash the real value of these entities.
Gives an exposure to high-quality companies in various sectors that are scripting the industrial growth story of the country.
Contrary to common perception, this asset class is more resilient and yields more dividends compared to stocks of some private sector companies.
The recent economic reforms of the government have put the PSUs on a higher pedestal with more opportunities knocking on their doors.

Factors to be considered while investing in PSU stocks

Choose the right sector: While scouting to invest, it is important to zero in on the best sector to park your hard-earned money. Weed out the sectors that could be a burden. Factors such as the future prospects, international and national trade parameters, and the government’s macro-economic reforms relating to various sectors should be taken into consideration.

Presently, the hot picks among the PSUs are stocks relating to capital goods and defence segments, as they have constant work flows and expansion plans, and oil refining companies, due to international softening of crude oil prices and deregulation of retail oil prices. Some sectors on the bottom of the list are power and mining sectors which are, to a certain extent, facing adverse global trends.

Keep an eye on sector-wise developments: Always keep a tab on what’s happening in various sectors and grab the opportunities. For example, the recent decision of the US to lift sanctions against Iran will lower oil prices and augur well for oil companies in the country. This will eventually result in stocks of the oil refining companies going northwards.

Also, check whether the PSU under consideration is offloading the residual stake, paying more dividend to the shareholders or if there is any cross-holding of shares by the PSUs in the same sector. These developments will affect the valuation of the PSUs and thereby their stock prices.

Check the fundamentals: It is imperative to check the basics of a company before investing in it. A meticulous evaluation of the fundamentals of a PSU will reveal whether there will be an increase in returns in the immediate future.

Return on capital employed

This is a key parameter that should be kept in mind while deciding whether an investment in a PSU is viable or not. A higher return on capital employed shows that the PSU is on healthy ground and is optimally utilizing available resources. Invest in a company with a higher return on capital employed.

Earnings per share

This basically translates to what the shareholder would get at the end of the day. So, obviously a higher EPS will increase the wealth of the shareholders. Go for a PSU with a higher EPS.

Cash Flows

The quantum of cash flows from the core operations determines the basic financial muscle of a company. It points to the company’s efficiency in turning sales into cash or optimizing its payments and credit lines. Find out whether a PSU is making enough money from its main operations. If there is a steady flow of cash, then it may be prudent to invest in that company.

Apart from these, a low price-to-earnings (PE) ratio and rising operating profit margin (OPM) will stand in good stead for the investors.

To conclude, in the past two years, PSU stocks have clocked returns of close to 40 per cent and this has created a positive vibe for the state-owned enterprises. Choose the right sector and the right company by closely evaluating the pros and cons, and invest in a PSU that fulfils your financial needs.

Powered by

BankBazaar.com is a marketplace where you can compare and apply online for loans to meet all your personal loan, home loan, car loan and credit card needs from India's leading banks and NBFCs.

Recommended by Rediff.com