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Retail investors should be selective about investing in public sector stocks

The government's keenness to sell shares in public sector units (PSUs) should be music to the ears of many investors.

According to the government's plans, 60 PSUs will issue shares through initial public offerings (IPOs) or followon public offers (FPOs). Some mega issues of unlisted companies that investors can expect include from Bharat Sanchar Nigam Ltd, Sutlej Jal Vidyut Nigam Ltd and Coal India.

Also, the government plans to pare down its holdings in listed entities such as National Thermal Power Corporation, Rural Electrification Corporation and National Mineral Development Corporation (NMDC).

No wonder fund houses are planning to launch PSU-oriented schemes. Sundaram BNP Paribas PSU Opportunities and Religare PSU Equity have already been launched. Market sources said SBI Mutual Fund could be planning a similar scheme.

PSUs have the potential to give high returns at least for the next three-four years. The divestment would give these companies better operational flexibility and increase accountability. It could lead to re-rating of these stocks, he said.

At present, this asset class has a valuation gap compared with the private sector. This will narrow as operational parameters of PSU companies improve.

The good news does not end there. PSUs today account for around 30 per cent of the overall market capitalisation of the Bombay Stock Exchange. Market experts expect this to go up to 40-45 per cent in the next two-three years.

All these factors make PSU stocks or schemes ideal investments. These are quality companies in sectors that are core to India's growth story, explaining that they are backed by the government and so unlikely to go bust in the near future. Also, many of them have huge order books and are known to pay high dividends.

However, the positives come with aword of caution from experts. For one, investors looking for listing gains should avoid these stocks. Given that the markets are in an uncertain zone, many of these stocks may not list at a big premium. Ideally, look at these stocks with a long-term perspective, at least two-three years.

Further, experts are worried about valuations. Looking at the price the government has fixed for NTPC's share sale, I think retail investor should stay away from PSU companies. It clearly shows that the government is planning the sale based on market prices and not real valuations. The share price for the FPO is not justified. There is a discount for employees but not for small investors. The example of NHPC and Oil India. After losing money in NHPC's IPO, retail investors preferred to stay away from the Oil India issue.

Meanwhile, the government's keen approach to divestment has led to a huge rally in PSU stocks. Just a couple of weeks ago, the PSU index hit its 52-week high. In fact, it has outperformed the Sensex in the last one year. While Sensex's returned 78 per cent, the PSU index returned 88 per cent.

Though there has been some correction recently, experts suggest caution. Small investors will see better buying opportunities in the near future.

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