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Diamonds in the dust

Dhirendra Kumar

The public sector stocks are making a comeback. And for understandable reasons - with symptoms of economic revival getting stronger and a stable government, which is likely to roll the divestment program after a long-wait. With their fundamental strengths and strong competitive position occupied by these companies, if given greater autonomy, some of these will emerge as competitive global giants. Besides select sectors with public sector monopoly - oil & gas and telecommunications, will benefit significantly from the liberalisation.

And perhaps the public sector companies are the only truly professionally managed companies, with relatively strong standards of corporate governance with no conflict between the economic interests of the shareholders and managers. There is also greater transparency with mandatory reviews by the controller and Auditor General of India and accountability to parliament.

To participate in the emerging rally in the PSU stocks, there are funds with special focus on PSU stocks, though there isn't a PSU dedicated fund. And these funds have been a key beneficiary of the upsurge in their values. These funds become attractive for another reason as well. The trading volume in PSU stocks is low. The average trading volume of the 30 PSU is 0.21% as a percentage of the floating market capitalisation. This low liquidity increases the impact costs of transactions in PSU stocks. The existing fund will not be constrained by the low liquidity in these stocks.

Infact, the existing divested PSUs, UTI holds 64% of the divestments to date. These have been acquired at attractive prices during earlier divestments. This represents almost 33% of the floating stock of the 30 PSUs. With UTI's dominance in the public sector divestments, three of the available equity funds of UTI - Mastergrowth, Masterplus and Mastershare are loaded with PSU stocks besides Canbank's Cantriple.

Mastergrowth:

The closed-end equity fund has stated objective of investing up to 50 percent of its fund in PSU stocks. The fund is due for redemption in April 2000. Master Growth has closely tracked the BSE Sensitive Index. Initially, the fund hit a goldmine in PSU's and in less than a year's time the funds NAV was Rs 21. The fund lost most of its gains in the bear market that followed. Mastergrowth managed to guard its NAV at Rs 13, its lowest NAV in November 1995. Master growth has been fully invested in equities with a low portfolio turnover. Mastergrowth has also been relatively more stable with its large cap orientation. Incidentally, with its PSU focus and because of its size the fund has largely been into large capitalisation value stocks. Barring three large capitalisation FMCG stocks, Hindustan Lever, ITC and Nestle the fund has no exposure in hot sectors like Pharma and Infotech. As large capitalisation cyclical stocks have been out of favour till recently, the fund has closely tracked the Sensex.

The corpus was deployed in 94 stocks of which nearly 17 are PSU stocks. The fund is reasonably concentrated with the top ten holdings accounting for almost 64 percent of the net assets. The remaining equity portfolio is also in sound health with stakes in large-cap blue chips mainly the Sensex stocks.

With large capitalisation value stocks back in favour in recent months, the fund has gained handsomely. Mastergrowth is up 53.61 per cent since April 28. As the turnaround in values of these stocks is in a nascent stage, there could be significant upside potential to the fund. Mastergrowth could be a key beneficiary of this trend reversal with its well-diversified portfolio of large-cap value stocks. Besides a bright portfolio outlook, the fund trades at Rs 18 against its NAV of Rs 20 as on October 6, '99. This will translate into a 10% yield to investors for a holding period of 6 months, as the fund is due for redemption on April 15, 2000. There could be potential gains if the rally in large-cap stocks continues. Mastergrowth could be an attractive investment today with little downside. Besides, the waiting till redemption in April 2000 is likely to get reduced, as Mastergrowth is likely to go open-end.

Masterplus:

Masterplus a large open-end equity fund has been an above average performer since its launch both in terms of performance against benchmarks and against its peers. In terms of absolute returns, the fund has given an annualised return of 15.36% in its eight-year history. As Masterplus was the second equity fund from UTI launched five years after the first Indian equity fund, Mastershare, the fund raised almost Rs 1,000 crore. The launch of Masterplus coincided with the government's first round of public sector disinvestment. This proved to be a rewarding coincidence for the fund, as Masterplus was able to invest heavily into PSU shares at attractive prices.

The initial success of Masterplus'91 can be largely attributed to its aggressive positions in PSUs. In a rising market and the buoyancy in the PSU stocks, Masterplus NAV touched a high of Rs 29 in December 1994. However, with the fall of market in the bear phase and PSU stocks going out of favour, the fund somehow managed to guard large parts of its initial gains and drifted with the market. With its large asset base, the fund was saved from the calamity of landing into small cap IPO's, the market flavour in 1994. In caledar 1999 year-to-date, Masterplus is up 54 percent.

It has been a significant beneficiary with the improvement in the outlook of the cyclical stocks in the current stock market rally. With the momentum of the cyclical stocks gaining solidity combined with increasing market fancy for PSU stocks, Masterplus will be a key beneficiary. Near-term, leadership within the sector will likely be in the large capitalisation and most liquid stocks. And Masterplus is heavily invested in these stocks like Hindustan Petroleum, Hindalco, Reliance, Larsen & Toubro, Telco, ACC, Grasim and others. If the rally in cyclical stocks continues, the prospects for Masterplus look bright. However, the only negative is the exit load of 3 percent and serviceability issues.

Mastershare, the first Indian equity fund has been a very rewarding investment for investors till now with an annualised return of over 25 per cent over its long tenure. Mastershare has been fully into equities during the three-year frenzy bull phase and the interim troughs during its thirteen-year life span and has been able to outperform its benchmark in all market weathers.

However, the huge size of the fund coupled with sluggish stock market performance has deterred the fund from keeping pace with its aggressive growth peers. The Rs 1,800 crore fund is spread over 266 stocks. The fund is increasingly getting concentrated in its top holdings, with top ten stocks in the equity portfolio account for nearly 49 per cent of net assets, while top 30 accounts for 77 per cent. Mastershare is a truly blue-chip portfolio, with significant positions in large capitalisation cyclical stocks including a wide range of now fancied PSU stocks. Till recently, the fund was a laggard in a market, which was dominantly propelled by select growth sectors. However, the fund recently went ballistic with the market gaining handsomely since April 1999. Besides its blue-chip PSU orientation, Mastershare is also attractive for its discount and annual dividend.

Cantriple Plus:

Now an open-end balanced fund with over 60 percent allocation to equities. The fund is up over 40 percent over the past one year. The fund's equity portfolio is stacked with PSU stocks accounting for a third of the total net assets. Though not all of them are bluechips as Hindustan Zinc, Bharat Electronics, Hindustan Cables and Bongaigaon Refineries and State Trading Corporation are inactive and illiquid or are out of favour. The fund with its size, structure and PSU loaded portfolio looks poised for a major leap.

To view the PSU portfolio of the funds click here

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