PSU Stocks: Deep Value Or Value Trap?

There is a general feeling among investors that PSU stocks make for a safe bet during economic downturns due to the high dividend yield they provide. However, after years of underperformance, do these stocks still hold the promise of good returns? Join Anthony Fernandes as he looks at what is in store for this largely beaten down segment.

- Anthony Fernandes

When a storm hits the sea, it is the land that seems to be the safest. In that context, when the virus pandemic hit the world, investors around the country looked towards safe sectors to protect their capital. Out of the many sectors one can stay invested in during these tough times, public sector units (PSUs) are often considered safe bets by many. The high dividend payout that often characterise these stocks is a much-needed relief during times of economic downturn, and hence many investors look to allocate a certain percentage of their portfolio to PSU stocks at any given time. That being said, these stocks have been far from safe havens.

The Sensex rose from the levels of 17,570.82 to 33,780.89 during the past decade, generating an absolute return of 92.26 per cent and an annualised return of 6.75 per cent. But people who invested in PSUs have been left disappointed. The BSE PSU index shrank 47.87 per cent on an absolute basis or 6.31 per cent on an annualized basis during the past 10 years, falling from 9,204.33 to 4,798.04.The performance of the PSUs has not been any different over the short term as well. While the Sensex has dropped by around 15 per cent on a one-year basis, the BSE PSU index lost a massive 37.37 per cent during this period.

On a YTD basis, the BSE PSU index has fallen by 31.35 per cent whereas the BSE Sensex has fallen 18.22 per cent. It was only over the last month that PSUs outperformed the bellwether index. It has been a similar story when it comes to mutual fund investors who relied on the PSU theme. Over the long term, PSUs have not given investors anything to cheer about. Even though some of the PSU-themed mutual funds did better and generated positive returns during this period, these were too meagre to offer any comfort.