The price-to-book ratio of PSUs continues to trail
The government has said it will actively nudge mutual fund (MF) managers to allocate a larger share of their portfolios to Public Sector Undertakings (PSUs), hoping to reposition these state-owned enterprises as credible long-term investment options. MF managers, however, are cautious.
On April 9, Department of Investment and Public Asset Management (DIPAM) Secretary Arunish Chawla had emphasised the government’s intent to increase retail participation in PSUs through MFs.
“While PSUs account for only 10 percent of the market cap, they deliver nearly 25 percent of the overall dividend payout,” he said.
This comes amid a broader strategy to improve PSU valuations. By improving market perception and driving demand from institutional investors, the Centre hopes to unlock more value from PSUs.
Why MF managers are cautious
“The price-to-book ratio of PSUs continues to trail private-sector counterparts. Forward earnings estimates are far more favourable for private firms, making them the obvious choice for funds chasing high-growth potential,” an MF industry source told Moneycontrol.
Price-to-book ratio compares a firm’s market value to its book value and is often used to assess undervaluation. Forward earnings reflect projected profits, which investors use to gauge future growth. While PSUs may lag on these metrics for now, ongoing reforms could pave the way for greater institutional interest.
While PSUs offer strong dividends, private companies are perceived as better long-term bets due to their risk-taking ability and aggressive expansion strategies, sources said.
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According to a Motilal Oswal report, PSU banks now form only 2.8 percent of MF exposure, while private banks account for 18.4 percent.
Changing outlook
Still, there are early signs of change. MF managers acknowledge that PSU reforms are gaining traction. “There’s a visible shift in investor outlook. Better corporate governance, improved disclosures and increased autonomy in decision-making are making PSUs more investable,” said the industry source. As investor sentiment gradually shifts, MFs may revisit their PSU exposure.