Why are mutual funds desperately buying PSU stocks? 3 revealing charts

The average count of PSU stocks in a scheme ex-SBI has reached closed to the number last seen in 2013, even as the total positioning (size of positions) in these names is still much lower compared to the history, Elara Securities said in a strategy note. The breadth of MF participation -- as measured by average number of PSU stocks held by an active scheme, has started spiking sharply since October 2023. This is because of the sharp outperformance in this pocket compared to the overall markets, the domestic brokerage said.

"There is a desperation to participate in the PSU story hence we are seeing players mining deeper and adding more PSU names to the portfolio," it said.

Elara said PSU stocks have been losing market capitalisation sharply since 2009. "We saw a small recovery in 2014-2015 period (post MODI victory for the 1st time) and then in 2016-2017 period (post demonetisation and banks' recapitalisation plans).

However, both were short lived, and PSU kept losing m-cap relative to overall markets, Elara said.

"It finally dropped to 8 per cent by November 2020 from where we saw a resumption in Global Value trade. Currently the ratio has reached back to 2017 zone but still rising rapidly. In this context, we have tried to see how MFs are already positioned in PSU stocks and where we could see participation coming back sharply in order to chase this trade," Elara said.

As per Elara Securities  SBI, BPCL, Bank of Baroda, ONGC, IOCL and Bharat Electronics have seen a decrease in positioning over the last few years. Hence, they can see resumption in buying interest.

"Among the above names, participation in ONGC has just begun last month. BPCL remains most attractively positioned purely based on MF holdings. It has seen big trimming of positions (most schemes remain invested in HPCL) while number of schemes holding the stock also remains low. SBI, being a large cap stock is already owned broadly but most schemes have trimmed their holding. Hence can be a good risk adjusted bet if one wants to play the PSU rally," Elara said.

Similar to SBI, said Elara, holding in Bank of Baroda has come back to a 2-year low zone although participation is fairly broad. Hence, any rescaling of those positions can offer upside. Other PSU banks such as PNB, BOI, Union Bank & Indian Bank; all have started witnessing a new high level of participation not seen at least since 2013.

 

"MF positions have been sharply dropping in IOCL since 2021 while number of schemes holding the stock also remains low (26 active schemes). Hence, we can see broadening of participation here.

Power Finance, RECL, HPCL, NTPC, Power Grid, NHPC, COAL, HAL- These names already have higher positioning and participation. Hence may not see strong chasing interest although they could continue performing based on their earnings," Elara said.

Among metals, SAIL has started seeing re-emergence of interest over the past 2 months as many new schemes have started adding positions. Based on the history, the stocks positioning has some more room to increase, Elara Securities said adding that NMDC’s positioning and participation are already running on the higher side.

"Many PSU names like – SCI, Hindustan Copper, NBCC, Engineers India, Mazagon Dock, MOIL, Gujarat Narmada Valley, Gujarat State Fertilizers, Bank of Maharashtra, Chennai Petroleum, MMTC, GMDC, National Fertilizer, IOB, Central Bank of India have still not seen much participation by MFs in the current PSU frenzy. We could see some of these names getting into portfolios to just participate in this PSU move," it said.

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