wealth4u: [63] More on Religare PSU Equity Fund

Six Reasons to own Religare PSU Equity Fund

1. PSUs - Strong Fundamentals

Unlike popular perception, most of the PSU companies in India are leaders in their respective areas of operation and in many sectors they have a virtual monopoly. In addition, many of the PSU companies have their presence in core sectors and therefore, considering the Government thrust for infrastructure, these companies offer strong growth potential for years to come.

BSE PSU INDEX - Sectoral Composition
The BSE PSU Index has nearly 65% weightage in financials, industrials,
minerals and utilities – these sectors are core to the India growth story and will benefit from the Government focus on infrastructure and reforms. The expected re-rating of these companies in future and increased shareholder value in the event of Government divesting stakes, can lead to above average gains over a period of time.

Source: BSE India; Data: Aug 09; Industry Classification: AMFI

³ Source : Religare MF, in terms of market capitalisation

2. Low Debt–Equity Ratio

Makes them less vulnerable in case of a downturn

Many of the PSU companies have low debt or have surplus cash on their books, which puts them in an advantageous position in comparison to their private sector counterparts when it comes to funding their expansion programmes. Because of the low debt-equity ratio, the cost of servicing debt lowers the fixed costs and makes PSUs less vulnerable to a slowdown in earnings growth.

Company	Market Cap (Rs.crs)	Net Debt to Equity Ratio
Indian Oil Corpn. Ltd.	70168	0.46
Chennai Petroleum Corpn. Ltd.	3024	0.68
Neyveli Lignite Corpn. Ltd.	21844	-0.15
BEML Ltd.	4628	-0.13
Steel Authority Of India Ltd.	67181	-0.53
GAIL (India) Ltd.	42545	-0.15
Container Corpn. Of India Ltd.	15405	-0.44
Bharat Heavy Electricals Ltd.	113055	-0.76
Dredging Corpn. Of India Ltd.	1509	-0.21
Oil & Natural Gas Corpn. Ltd.	253563	-0.23
Bharat Electronics Ltd.	11404	-0.76
Engineers India Ltd.	5899	-1.09
Mahanagar Telephone Nigam Ltd.	5988	-0.32
National Aluminium Co. Ltd.	22251	-0.40
NMDC Ltd.	149093	-0.83

Source: Bloomberg; Data: FY09; Market Cap: 31/08/2009. Net Debt to Equity Ratio: A measure of a company's financial leverage calculated by dividing long-term debt (adjusted for cash) by shareholders' equity. It indicates what proportion of equity and debt the company is using to finance its asset.

3. Valuations – PSU Stocks are available at attractive valuations

Index	Price/Earnings	Price/Book value
BSE PSU Index	16.14	3.00
BSE Sensex	18.86	3.32
BSE 200	19.32	2.97
BSE 500	19.98	2.82

Trailing 12 month (TTM) Source: BSE India. Date: 31/08/2009

As the above table suggests, currently PSU companies are attractively placed in terms of valuations vis-à-vis the broader markets and the BSE Sensex. BSE PSU Index is trading at relatively attractive trailing P/E multiple of 16.14 as against 18.86 P/E of Sensex companies, with better earning growth rate than the Sensex. Valuations as measured by P/B multiple also suggest that PSUs are better placed than the Sensex companies.

4. PSU Companies – Wealth Creators

Out of the 50 companies which constitute the Nifty index, 10 companies with a combined weightage of 14.80% are from the PSU space (BHEL, BPCL, GAIL, NTPC, NALCO, ONGC, Power Grid Corporation, PNB, SBI and SAIL).

PSU Companies' contribution to Index Performance
Index	No. Of Companies	PSU companies in the index	Combined Weightage of PSU Stocks (%)
S&P CNX Nifty	50	10	14.80
BSE Sensex	30	4	14.22

Source : Prowess, Religare MF. Data : As on 31st Aug 09. Past
Performance may or may not be sustained in future

A portfolio of these 10 stocks (equal weighted) has outperformed the Nifty in the last 1 year, by generating returns of 24.36% vis-à-vis Nifty return of 6.89%. BSE PSU Index (an aggregate of 47 PSU companies) has appreciated by 24.09% over the last 1 year, as against BSE Sensex's return of 7.52%. (As on 31st Aug, 09).

Performance may or may not be sustained in future

SIP Analysis - A hypothetical systematic investment plan (SIP) made in BSE PSU Index and BSE Sensex. Rs.1,000/- invested on the first business day of every month. Start Date : Feb 1999
Index	Total Investment(Rs.)	Value Of Investment (as on 31st Aug 09)(Rs.)	Combined Weightage of PSU Stocks (%)
BSE PSU Index	1.27lacs	5.18lacs	24.87
BSE Sensex	1.27lacs	3.62lacs	18.67
XIRR: Internal Rate of Return. Past performance may or may not be sustained in future. The above investment simulation is for illustrative purpose only and should not be construed as a promise on minimum returns and safeguard of capital. The AMC / Mutual Fund is not guaranteeing or promising or forecasting any returns.

5. Benefit from Disinvestment

The Indian capital market regulator proposes to make it mandatory for all listed companies to have minimum public holding of at least 25%, which means promoters having stake above 75% will have to dilute their holding to that extent. With an almost clear mandate and Government's resolve to garner funds through disinvestment, the FM in his speech has proposed to increase the threshold limit for non-promoter public shareholding for the private sector as well as public sector companies. Many PSU companies would be automatic candidates for disinvestment in years to come. PSU companies, other than the listed ones lined up for disinvestment could include Coal India, LIC India, BSNL, Nuclear Power Corporation etc. Religare PSU Equity Fund would also look at investing in IPOs of these companies which will be available for investment.

source: media reports

6. Dividend Gains

While the growth potential clearly exists, there is another aspect that adds to the need to look at PSU companies closely; that is they have a strong dividend payout history. PSU companies provide attractive dividends and this dividend paying habit of PSU companies has been seen in bear phases of market also.

Company	Dividend (%)
Company	2008	2007	2006	2005	2004
Andhra Bank	40	38	35	30	28
BEML Ltd	120	120	100	100	20
Bharat Electronics	207	180	146	112	100
Chennai Petroleum	170	120	120	120	50
Dredging Corp	150	150	150	120	120
Engineers India	110	95	80	75	65
GAIL (India)	100	100	100	80	80
Neyveli Lignite	20	12	20	20	14
NMDC	385	352	277	115	35
NTPC	35	32	28	24	14
ONGC	320	310	450	400	240
Punjab National Bank	130	100	90	60	40
SAIL	37	31	20	33	0
State Bank of India	215	140	140	125	110

Source: Capitaline. Past Performance may or may not be sustained in future.

⁴Source: D& B Report. FY 08

Who should invest in Religare PSU Equity Fund?
•	Investors looking for an opportunity to own performing public sector giants

•	Investors looking forward to benefitting from the long term value unlocking in Public Sector Enterprises.

•	Investors looking for diversification.

Posted by Unknown at 10/21/2009 11:12:00 pm

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