Don’t say all PSU stocks are Junk and all Private stocks are Gold
Ramesh Damani came down heavily on the tendency of some investors of shunning away from PSU stocks.
“It has become very popular to say I do not buy PSUs, I do not look at PSUs,” he fumed.
But if you are a genuine value investor, and particularly if you have a government now determined to disinvest, you should be looking at it, he advised.
Ramesh Damani also took strong exception to the view of some investors that all PSU stocks are Junk.
“If I put all the Dewan Housing and Manpasands in one sector, you would also see bad performance of the private sector,” he said, checkmating the nay sayers.
“You need to cherry pick”, he advised, implying that we are making a big mistake by painting all PSU stocks with the same brush.
PSU stocks have given mega multibagger gains in the past
“I made money in the past in PSU stocks,” he said, reminiscing the glorious days of the past when these stocks were much in demand.
Hindustan Zinc went from $200 million to a $20 billion market cap, he pointed out.
“It was up 100x and it gave dividend of $3 billion to the government,” he added.
He also paid tribute to Bharat Electronics and Container Corporation (Concor), which are among his all-time favourite stocks.
“Bharat Electronics is a 200 bagger, Container Corporation has done brilliantly for the investors,” he said, his eyes sparkling with pride.
“That is the level of wealth creation which is possible because they are sitting on fabulous assets. It is just that they are held back by capital constraints or by governance concerns or they are just not incentivised to perform that much better,” he explained.
To Ramesh Damani’s list of best performing PSU stocks, we can add the names of RITES and IRCTC which are surging like rockets presently.
In fact, IRCTC is such a runaway success that the Railways have taken umbrage at the alleged under-pricing of the IPO by the merchant bankers.
— ETMarkets (@ETMarkets) October 17, 2019
— Economic Times (@EconomicTimes) October 14, 2019
Valuations are astonishing & throwaway, dividend yields are high
Ramesh Damani explained that PSU stocks are a value investors dream come true because they tick all the boxes.
Firstly, the valuations are rock bottom with single digit P/Es;
Secondly, the corporate tax cut would come straight to their bottom line and further reduce the P/E.
Thirdly, the dividend yields are attractive at almost 6%.
Fourthly, there is a chance of disinvestment which will make these stocks irresistible.
“It is hard to see such large sectors going at such astonishing valuations, where they have order book visibility of 10 years,” he observed.
“You have single digit PEs and yields of 5-6% … you cannot ignore stocks that are trading at such throw-away valuations …. The dividend itself will make up for the holding cost,” he added.
He also pointed out that the “added sweetener” or “cherry on the cake” is the possibility of disinvestment.
3x multibagger gains possible from PSU stocks
He pointed out that the aggregate market cap of all PSUs today is less than $140 billion.
“It is staggering that 50% of India’s assets are sitting in the PSUs. The market cap is $140-$150 billion on a 2-2.5 trillion kind of overall market cap and they have all fallen 65% to 80%,” he observed.
Even if the PSUs do nothing but just recover their lost market capitalization, they would surge to a $400-$500 billion valuation which would give investors a 3x multibagger gain, he theorized.
If you are bullish about NAMO, how can you not be bullish about PSUs?
Ramesh Damani made yet another brilliant argument to convince the Doubting Thomases that PSU stocks are a great buy now.
“If you are so bullish on Narendra Modi government, the BJP, how can you not be bullish on the companies that he is running? If Mr Modi came in with the one point mandate to change the corporate governance to ensure there is less corruption and to make sure economic activity would proceed unimpeded, now that he is the master of all the PSUs, how can you not be bullish on the public sector stocks?” he argued in a poignant manner.
Era of PSU disinvestment is here
Ramesh Damani pointed out that we are now entering the era of PSU disinvestment.
BPCL and Container Corporation are on the way to be disinvested.
Once that is done over the next few months, there will be a huge domino effect and all PSUs will come into demand.
He reminded us of the glorious days of 2000 when Arun Shourie had battled the odds and succeeded in making IBP private.
There was enormous excitement in the stock market and all PSU stocks had delivered handsome gains.
Prof @nandinigupta201 & I explain why india must sell PSUs to those who can run them the best. The picture below is worth a thousand words. With this performance of even listed PSUs should public money be spent on PSUs? Full article at https://t.co/5nr6YcHOv0 pic.twitter.com/kDVZS8rXqT
— Arvind Panagariya (@APanagariya) October 19, 2019
#BHEL had a peak Market Capitalization of Rs 125000 Cr
Today it is just around Rs 15000 Cr
In a strategic sale it can easily get sold at a price much, much higher than current market prices.
— sandip sabharwal (@sandipsabharwal) October 18, 2019
— Varinder Bansal ?? (@varinder_bansal) October 19, 2019
Is the CPSE ETF the best play on PSU stocks?
Assuming one is inclined to agree with Ramesh Damani, the question arises as to which are the best PSU stocks to buy.
The best solution appears to be the CPSE ETF which has the best of the PSUs packaged as one stock.
As of 15th July 2019, the composition of the CPSE Index is as follows:
|Indian Oil Corporation Ltd.||Petroleum Products||20.25%|
|Coal India Ltd.||Minerals/Mining||19.89%|
|Power Finance Corp. Ltd.||Finance||7.85%|
|Bharat Electronics Ltd.||Industrial Capital goods||5.96%|
|Oil India Ltd.||Oil||3.15%|
|NBCC (India) Ltd.||Construction||1.80%|
|NLC India Ltd.||Power||0.79%|
It can be seen that we get a diversified portfolio with top-notch PSU stocks from different sectors.
The CPSE ETFs has several advantages which have been nicely summed up by HDFC Sec.