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    Looking at PSU stocks? Careful, it can’t be a buy-and-forget strategy

    For stock investors, it is important to look at the industry outlook before picking up stocks.

    ET CONTRIBUTORS|
    Updated: Dec 14, 2019, 01.23 PM IST
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    The current total market-cap of the PSU companies is more than Rs 24 lakh crore.
    By DK Aggarwal

    dk


    PSUs or public sector undertakings (PSUs) are linked to the core sector of the economy and have successfully built a strong industrial base in the country. They are majority owned by the Government of India and reflect the industrial story. The core sectors of the economy – namely finance, capital goods, coal, oil, infrastructure, power, metal and mining – play a key role in the nation building process, which takes the economy in the right direction. The current total market-cap of the PSU companies is more than Rs 24 lakh crore. Actually, PSUs contribute a good amount of resources to the central exchequer regularly in the form of dividend, excise duty, custom duty and corporate taxes.

    PSUs get impacted by government policies. Most importantly, how much stake the government intends to sell in them in the future has a close linkage to the government finances. The country’s economic development and infrastructure growth are positively co-related. Economic development is impossible without the development of infrastructural facilities. Some of the important indicators to measure the performance of PSU companies are their share in GDP, gross domestic capital formation, employment generation as well as their role as price deflators for specific sectors.

    Investor seeking to invest in PSU stocks should look for green shoots in the economy, as their fortunes are closely linked to economic growth. For example, India’s infrastructure major sector, a key driver of Indian economy, has not been doing well of late. Analysts estimate it will be some time before they look up and that will be closely linked to the easing of fiscal tightness in the economy. Once it starts to perform, all allied sectors such as cement, steel, capital goods -- to name a few -- will see growth.

    In the current state of the Indian economy, PSU banks are expected to perform better that other sectors and they are expected to spur retail growth. Moreover, the reduction of non-performing assets (NPAs) in the system has made public sector bank quite attractive.

    For stock investors, it is important to look at the industry outlook before picking up stocks.

    There are also expectations of a cyclical recovery in the economy, and the PSUs are well placed to benefit from this. Parameters like free cash flow, return on capital, competitive business advantage, scalability of business and valuation will be the basis for making investment there. However, when it comes to investing in PSU stocks, one can’t follow the ‘buy and forget’ strategy.
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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